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The Chancellor is set to deliver his Spending Review against a brutal economic outlook
Meanwhile, Mr Sunak is poised to target pensions tax relief for high earners in order to balance the books as the economic cost of the ongoing coronavirus pandemic mounts in a move which could save the Government £4billion annually – with Tory MP John Redwood warning him against any attempt to “tax his way into prosperity”. An analysis by the Resolution Foundation has suggested the UK’s economy is likely to shrink dramatically as a result of the pandemic, with the impact likely to be felt for at least five years. Chief executive Torsten Bell said: “The Chancellor is set to deliver his Spending Review against a brutal economic outlook.
“Far from being a V-shaped crisis, the economic scars from Covid will be with us at least until the middle of the decade, with the economy set to be permanently smaller by £1,000 per adult.
“With public spending likely to reach 60 per cent of GDP, the state has grown this year to levels never seen outside of wars.
“The immediate question the Chancellor will be answering is how much of that extra spending will continue into next year, not least to pay for ongoing NHS costs and the vaccine roll-out.”
Pensions tax relief means some of the money which would otherwise have gone to the Government as tax goes towards an individual’s pension instead.
People on higher incomes currently enjoy tax relief on their pension tax contributions of 40 percent, compared with basic rate tax payers, for whom the rate is 20 percent.
One source suggested Mr Sunak was “very attracted” to the idea of a flat rate of 25 percent, a significant reduction for top earners.
The insider told The Times: “It’s a matter of fairness for him.”
A separate Government source suggested a shake-up of tax relief would likely necessitate a radical change of HMRC systems, and could take three years to put into practice.
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Adam Corlett, the Resolution Foundation’s principal economist, said: “With the crisis set to leave a lasting mark on the public finances, the chancellor will need to substantially raise tax revenue once the economy has recovered.
“Long-overdue reform of pension tax relief makes sense given the potential savings involved, and the fact that it overwhelmingly benefits higher-income workers.
“This should include reform of the tax-free lump sum.
“Moving to a flat rate relief of 25 per cent could raise several billion a year, while giving a boost to pension pots for the majority of workers.
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“But the chancellor shouldn’t underestimate the complexity of delivering such a reform.”
Mr Sunak will give a strong indication of his plans in his spending review on Wednesday, in which he is also expected to signal his intention for future tax rises.
Increases will then be announced in March – although they could be delayed if the economy subsequently plunges back into recession, according to Treasury sources.
However, he is somewhat boxed in by Prime Minister Boris Johnson’s opposition to rises in income tax, VAT or national insurance.
Mr Redwood tweeted: “You cannot tax your way into prosperity.
“Let’s have a positive economic plan for recovery next week based on backing enterprise.
“Let people keep more of what they earn to spend as they wish. We need more confidence not punishment.”
On Wednesday Mr Sunak is expected to announce an ambitious programme of infrastructure investment, including £1.6 billion to tackle potholes and traffic congestion.
He will also confirm plans to set up the Treasury’s northern headquarters next year, with the Government pledging to move 22,000 roles out of London and the southeast by the end of the decade.
Speaking earlier this week he said: “We are absolutely committed to levelling up opportunities so those living in all corners of the UK get their fair share of our future prosperity.
“All nations and regions of the UK have benefited from our unprecedented £200bn Covid support package.
“And after a difficult year for this country, this spending review will help us build back better by investing over £600bn across the UK during the next five years.”
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