The Organisation for Economic Co-operation and Development (OECD) has issued a stark warning to Chancellor Rachel Reeves, underscoring the urgent need for substantial fiscal reforms to stabilise the United Kingdom’s public finances ahead of her first budget presentation scheduled for 30 October.
The OECD’s report advocates for a series of sweeping changes, including the abolition of stamp duty, the recalibration of the pension triple lock, and a comprehensive update to the council tax system. These recommendations come in response to mounting financial strains posed by healthcare, pensions, and climate change, compounded by high levels of debt, increasing interest payments, and sluggish economic growth.
Recent forecasts from the Office for Budget Responsibility (OBR) have painted a grim picture, predicting that the UK’s debt could reach a staggering 270% of GDP over the next 50 years if left unaddressed. The OECD suggests revising the pension triple lock, which is currently tied to the highest of 2.5%, inflation, or wage growth, to an average of inflation and wage growth. This adjustment aims to ensure a more sustainable fiscal trajectory.
Additionally, the OECD calls for the abolition of stamp duty, arguing that it discourages mobility within the housing market. This is coupled with a strong recommendation to reassess existing fiscal rules that categorize public investment as part of day-to-day spending, a classification that potentially stifles investment in productivity-enhancing projects.
Among other proposals, the OECD recommends unfreezing fuel duty, simplifying the income tax system, and reducing the amount of interest that companies can deduct from their tax bills. The organisation also highlights the necessity for updated property valuations for council tax, which are still based on figures from 1991, thereby not reflecting current market values.
The UK’s debt, exacerbated by the 2008 financial crisis, the COVID-19 pandemic, and rising energy prices, has soared to nearly 100% of GDP. Economists caution that debt becomes unsustainable when interest payments surpass economic growth, a scenario that the UK is currently facing. Approximately 9p in every £1 of government spending is projected to be allocated to debt interest payments over the forthcoming five years.
A Treasury spokesperson acknowledged the challenging fiscal environment and stated, ‘Difficult decisions lie ahead,’ as the Chancellor prepares for the impending budget. This sentiment reflects the tough choices that will need to be made to ensure the stability and sustainability of the UK’s public finances.
As the UK grapples with significant financial challenges, the OECD’s recommendations highlight the crucial steps necessary to ensure fiscal stability. The upcoming budget by Chancellor Rachel Reeves will be a critical moment to address these issues and set the UK on a more sustainable economic path.
