Permanent tax hikes needed to pay for health and social care, warns the government’s former economic forecaster

Case for end to fuel duty freeze in March budget ‘stronger than ever’, says ex-OBR chief

(PA)

Permanent tax increases equivalent to 1 or 2 per cent of GDP could be needed to fund increasingly expensive health and care services, a former head of the government’s independent economic forecaster has warned.

The hike would amount to around £25-£50bn a year, or the equivalent of approximately 5-10p on income tax.

But Sir Robert Chote, the former chairman of the Office for Budget Responsibility, said it would be “a surprise” if chancellor Rishi Sunak felt that he could permanently support a spending rise of this scale on the back of borrowing.

Sir Robert, who stepped down in October after 10 years at the helm of the OBR, also said that there was a stronger case than ever for Mr Sunak to increase fuel duties at his 3 March budget, ending a freeze in place for the last decade.

The former OBR chief said it was clear that any increases in health and care spending resulting from the ageing population and ever-growing demand for services would have to be paid for.

“We are going to want in future to spend, permanently, 1 to 2 per cent of GDP more on health and social care than we did before,” Sir Robert told Times Radio.

“It would be a surprise, if you felt you needed a permanent spending increase of that sort, that you didn't match it with a permanent tax increase, as distinct from just borrowing every year that much more.”

As the UK emerges from the unprecedented period of increased public spending due to the Covid-19 crisis, government will be faced with a set of choices not only about the underlying damage to the economy and the public finances, but also about the size and role of the state in the future.

And he suggested that the experience of coronavirus will lead to greater public demand for spending on health and other public services.

“You come out of it with people talking much more about ‘Do we have enough resilience, do we have enough preparedness in health and other public services?’” said Sir Robert. “If you want to have more of that, it costs money."

Sir Robert said that it was “one of the great ironies” that the OBR was always required to base its forecasts on stated government policy on tax and spending, even as it saw chancellors year after year tear up plans to hike fuel duties.

“It was always government policy to raise fuel duty in line with inflation, and then every year the policy was not adopted for that year,” he said.

“So if you were a betting person, you would be betting that that freeze remains in place.

“But I think the pressures to think again about it at a time when you're having to reevaluate the public finances as a whole (mean) it’s clearly a stronger case now for the people who'd like to see some more action on the back of that than it has been in the past.”

He added: “Most economists and most public finance watchers would certainly say that, that you do want to finally bite the bullet on that at some point.”

Fuel duty for unleaded and diesel cars was last increased in January 2011 to 58.95p, before being cut that April to its current level of 57.95p, where it has remained ever since, in a massive effective subsidy for motorists costing well over £100bn.