'£30bn tax rise' for ageing population

Taxes should be raised now to reduce the risk that an ageing population will leave future generations facing a crisis in the public finances, a leading think-tank said yesterday.

Taxes should be raised now to reduce the risk that an ageing population will leave future generations facing a crisis in the public finances, a leading think-tank said yesterday.

The National Institute of Economics and Social Research said a "one-off increase" in taxes was needed now to stabilise the budgetary position.

It said there was huge uncertainty in predicting future populations but found that on average a tax rise of 2.7 per cent of GDP, or almost £30bn, would be needed to fill the hole. This would be equivalent to an increase of 10p on the basic rate of income tax. But the institute warned there was a one-in-four chance that the tax rise would have to be worth more than 5 per cent of GDP.

Martin Weale, its director, said: "A failure to increase taxes promptly to cover the future effects of demographic change means that any future tax increases will have to be larger.

"Because of the degree of uncertainty surrounding the projection, a sensible policy would be to err on the side of caution and to increase taxes by more than the estimated average change needed."

By using models to forecast the population make-up over the next half-century, the institute found that the budget deficit - currently just below 3 per cent of GDP - would settle at about 4 per cent. But it said there was a 50 per cent risk it would be within a range of 3 and 5 per cent by 2028, with the risk of more extreme values on either side.

The report came a month after the Treasury maintained its view that the UK's long-term fiscal position was "sustainable on current policies". Treasury analysis points to the Government being able to eliminate its debt by the turn of the century, putting it in a stronger position to pay for the needs of the growing number of old people.