Income tax will have to rise, ex-Bank of England chief warns, as he blasts

A former Bank of England governor has slammed the chancellor’s pre-election tax promises as “irresponsible” and called on her to hike income tax.

Mervyn King, who ran the Bank from 2003 to 2013 and was the chancellor’s boss when she worked there, said Rachel Reeves made “silly” promises on tax before the general election and should row back on them in government.

Lord King also questioned the chancellor’s self-imposed fiscal rules, urging Ms Reeves to set rules in a way that would allow her to borrow more and boost government spending.

In the general election campaign, Labour promised not to hike VAT or income tax. The party also ruled out reversing a Tory cut to employee national insurance contributions, despite economists warning it was unsustainable at the time.

In her first Budget, Ms Reeves instead increased employer national insurance contributions, with the aim of raising around £25 billion a year.

But Lord King told Sky News she raised the wrong tax by doing so.

Mervyn King was the chancellor’s boss at the Bank of England - this week he said she made the wrong call on the tax to raise in her Autumn Budget (PA) — Mervyn King was the chancellor’s boss at the Bank of England – this week he said she made the wrong call on the tax to raise in her Autumn Budget (PA)

“I think it would have been better to have said in the Budget, ‘look the previous government was irresponsible in cutting employee national insurance contributions, but let’s be frank, we were pretty irresponsible in saying we wouldn’t reverse it’,” he said.

He said reversing Jeremy Hunt’s pre-election 2p cut to employee national insurance contributions would allow Ms Reeves to go back on her hike on employer national insurance bills, “which is affecting unexpected areas like charities”.

Lord King said: “I think it is possible to say to people, ‘maybe we said some silly things before the election, this is the situation Britain now finds itself in and this is what we have to do in the next four to five years’.

“I think people want politicians to be honest and give them a plan.”

But Lord King warned that reversing the cut to national insurance contributions would still not be enough, adding that “in the long run, to raise enough money, I think we will have to raise the basic rate of income tax”.

Rachel Reeves has been urged to reverse the Tories’ ‘irresponsible’ pre-election national insurance cut (PA Wire)

“I see no harm in doing that, provided, and this is a clear condition, it is being used to finance a well thought through programme of spending,” he said.

Asked whether Ms Reeves should also rethink her fiscal rules, which bar her from using borrowing to fund day-to-day spending and mean debt must be falling as a share of the overall economy, Lord King said the chancellor should give herself room to spend more.

He said: “The fiscal rules ought to be defined in terms of whether we think it is more likely than not that five years from now, the ratio of debt to national income will be able to fall.

“That would enable her to say, if we have to spend more now, and we don’t want to depress the economy in the next 12 months, we may have to borrow more in the next year, but in the rest of the parliament we will find a way in which, through raising taxes and cutting out waste we will be able to reach that target.”

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