Treasury Committee Hearing: Osborne and Cable on Budget 2025 and Tax Reform

The Rt Hon George Osborne CH, former Chancellor of the Exchequer, and Rt Hon Sir Vince Cable, former Secretary of State for Business and Trade, appeared before the committee to share insights from their time in office and offer perspectives on the fiscal challenges facing Chancellor Rachel Reeves.

The hearing provided rare insights into Budget-making from two ministers who grappled with fiscal consolidation in the aftermath of the financial crisis, offering candid reflections on the political constraints facing any Chancellor attempting tax reform or revenue raising measures.

Tax Levels and Revenue Raising

The session devoted considerable attention to tax policy, with both witnesses acknowledging that substantial tax increases appear inevitable given the fiscal pressures facing the government.

Sir Vince Cable challenged what he described as a misconception about Britain's tax burden, noting: "Our tax level in relation to GDP is fairly close to the OECD average. Part of the problem is that we have an aspiration for Scandinavian public services but we don't have Scandinavian levels of tax to pay for them."

Cable emphasised that tax increases should be combined with reform, suggesting that "if an income tax rise were coupled with integration of the employee national insurance system—partial integration, or a stepping-stone, effectively, to make the two the same—that would be a very positive step."

George Osborne cautioned against relying solely on tax increases, suggesting that “you have to put them alongside expenditure reductions and constraints." He warned that breaking the government's manifesto commitment on the main taxes would be politically difficult, though he noted the precedent of the Sunak- Johnson government increasing national insurance having promised in their 2019 manifesto that they would not.

Osborne expressed concern about the cumulative impact of multiple smaller tax rises, stating: "The trouble is, if you don't use one of the big taxes, you are left with lots of little ones, and I would argue that part of the problem last year was that. An increased capital gains tax or changes to the non-dom regime might be individually defendable, but put them all together and they give an overall impression of the UK being quite anti-enterprise or anti-foreign wealth."

Property Taxation

Both witnesses supported reform of property taxation, revealing previously undisclosed details about coalition-era proposals.

Osborne disclosed that the coalition had agreed to introduce two additional council tax bands for high-value properties—one for houses worth more than £2 million and one for those worth more than £5 million. The money raised was going to be used to reduce the top rate of income tax from 50% to 40%. The proposal was, he said, ultimately vetoed by Prime Minister David Cameron, who "felt the Conservatives had promised not to have a mansion tax, under pressure in opposition from Dr Cable and others, and he also thought in 2012 reducing the top rate of income tax from 50% to 40% in one go was too much politically."

Cable reflected on the political economy of property taxation, acknowledging: "The honest point that one has to acknowledge is that, although I advocated it, it [a ‘mansion tax’ of some form] does not actually raise very much revenue. That is why I would now argue that you probably have to go rather further… We should aim to move to a more proportional system of taxing property although… that is not at all straightforward." He thought that as part of this we could “get rid of some of the worst features of the stamp duty system."

Osborne noted the challenges with transitional arrangements: "The simplest way to do a property tax in the UK would be to do what New York State has or California has, which is just a percentage of the value of the house, which you pay each year. But that would be quite a revolution for the UK. And remember, you have to go and value all these properties all the time, which is a big, big challenge."

National Insurance and Employment Taxes

The witnesses were critical of the Chancellor's decision to increase employer national insurance contributions.

Cable said the change “was based on the assumption that employers would pay it, but they do not: it is passed back to workers and it cuts jobs. It was not a good tax. It has damaged business confidence. It stemmed from the unwillingness to raise taxation through the main tax system."

He warned of negative secondary effects: "One of the main damaging consequences is that it has provided a big boost to the gig economy, because Deliveroo does not pay employer national insurance; it relies on the honesty of the deliverers."

Osborne highlighted the cumulative burden on employers, arguing: "The trouble is the combination of three things: the increase in employer national insurance; the rising living or minimum wage… and employment law changes." He warned this could lead to rising unemployment, particularly in light of potential AI-driven automation.

Both witnesses supported merging income tax and national insurance as a priority for tax reform. Osborne said it was “sort of odd that we have two taxes on income, but of course they are taxed on different forms of income and different ages.” He acknowledged it would be quite complicated to do. He told the committee he had looked at it “pretty closely” when he was Chancellor.

Cable said: "If the Chancellor could choose just one area, income tax and national insurance is probably the best. It also has the effect of bringing in new taxpayers, landlords and earning pensioners like me into the tax net."

VAT and Indirect Taxation

On VAT, Cable noted that "Value added tax is 25%, I think, in every one of the five or six Scandinavian countries. If we want those levels of services, that is the kind of tax structure one would have to think about." However, he advised against a VAT increase in the upcoming Budge “for the obvious reason that it would make a significant impact on the cost of living, inflation, in the short run, and would be very difficult to reconcile with the other objectives of government."

Cable also highlighted inconsistencies in fuel duty policy: "We have cut fuel duty by 40% in the last 15 years or so, for political reasons. That is bad for revenue and bad for the environment. Any academic economist would say that we should be moving across to road user pricing, which we will need anyway when we have electric vehicles. But the politics of that are just very, very difficult."

Reflecting on the introduction of the soft drinks industry levy, Osborne said it was an example of the ‘rabbit out of the hat’ working. “If I had announced a sugar tax in advance and consulted on it, it would have been killed by the industry and lobbying forces out there. But it was done as a surprise in a Budget, so by then it is already happening and people are reacting to it.”

Pension Taxation

The hearing explored various aspects of pension policy and taxation.

Osborne expressed regret about the abolition of the lifetime pension savings limit by the previous Conservative government: "Personally, I did not really see the point of the last Conservative government getting rid of the limit on lifetime pension savings, which I had brought down." He suggested this decision was “the tail wagging the dog”, prioritising addressing problems with defined benefit schemes for senior public sector workers over broader fiscal prudence.

Osborne supported increasing auto-enrolment rates beyond the current 8%, describing the policy as "a very successful UK policy pursued by governments of all colours." However, he defended the triple lock on state pensions, noting its origins in addressing pensioner poverty. Cable argued for reform: "If we moved from a triple lock to a double lock and simply removed the mandatory 2.5%, which is way in excess of current or expected economic growth, that would provide pensioners with protection, but it would also put it on a more sustainable basis."

Osborne revealed an unrealised ambition to replace pensions with ISAs as a savings vehicle: "If I was given a ninth Budget, I would definitely have done that. People understand ISAs...There is an idea that you could essentially replace pensions with ISAs as a vehicle for saving, so that things are tax-free on the way out rather than tax-free on the way in." He admitted: "On the pension changes, I made what in hindsight was the mistake of consulting on them, and the pensions industry went mad and I had to back off." (He contrasted this to the ‘sugar tax’ announcement.)

Fiscal Headroom and the OBR

Both witnesses defended the Office for Budget Responsibility while suggesting it should take a less interventionist approach.

Osborne said the problem was not how the number of forecasts – he thought it should continue to have two a year – but rather the OBR becoming too involved in micro-forecasting.

Cable warned against the OBR becoming "a kind of whipping boy for political failures," noting: "I think what has happened—and I don't think it is the fault of the OBR—is that it has moved from a position of just marking the government's exam papers to setting the exam questions, and they are very difficult questions."

On fiscal headroom, Cable argued for more substantial buffers given economic volatility: "We have had evidence of growing volatility in the big macroeconomic factors that governments have to deal with...There is a very powerful argument in principle for having a significantly higher level of headroom than we have at the moment."

Fiscal Drag and Threshold Freezes

The witnesses disagreed on how to address fiscal drag from frozen tax thresholds.

Cable strongly opposed continued threshold freezes: "Fiscal drag is one of the worst ways. It is politically attractive, because it is relatively concealed. The big choice we had in the coalition—this government have it as well now—is: do you just allow income tax receipts to rise by freezing thresholds, or do you go for the basic rate?” He said that allowing fiscal drag to operate was “much the more regressive of the two options” so his “very strong preference” between the two is raising rates.

Osborne took a more pragmatic view: "When we were in government, we did the exact opposite: we raised thresholds...but if you were sitting in the Treasury today—well, I think that if the Labour Chancellor raises income tax rates for the first time since the 1970s, having specifically promised not to do that in the manifesto, it is going to cause real political hardship for the government...continuing the Conservative government's income tax freeze looks like a much more attractive option if you are actually putting together a Budget."

Brexit and Trade

Osborne said there had been “a kind of conspiracy of silence” about the “very obvious” damage that Brexit has done. “You could have left the European Union in a very different way with much less economic damage. Indeed, at the time, there was a strong argument from some Brexiteers that we could have stayed in the single market and the customs union.” He said he personally thought that the Labour Government should have rejoined the customs union on entering office.

Cable said the OBR’s evidence suggested “that the cost to our GDP is even worse than some of the more pessimistic predictions. I think we are talking about GDP being 5% less than it otherwise would have been, and that probably excludes the damage to business confidence, because there was a very sharp fall in business investment immediately after 2016.” All the bilateral trade deals since Brexit added up to no more than a tenth of what had been lost, he continued. He suggested that the US trade agreement had meant giving up the UK’s technological sovereignty—"it involved us accepting that we cannot tax or regulate big tech companies, which was an extraordinary thing for the government to have conceded”.

Broader Reflections on Budget-Making

Osborne emphasised the political realities of Budget construction, observing that there are "around 4,000 decisions in a Budget. Many are on a tractor beam of things that, frankly, almost anyone doing the job would probably do." He stressed the importance of narrative clarity: "What is lost is the first sentence of the Budget: what is this Budget about? Can you sum it up in a sentence, so that you can explain to Parliament, the media and therefore the public what this whole mass of measures is really about?"

Both witnesses acknowledged the constraints imposed by bond markets. Cable recalled being told "in the first few days of the formation of the coalition government, by all the senior economic advisers to the government—senior civil servants—that the overriding concern for the country was the pressure from external bond markets and that, whatever else we did, we had to observe strict financial and fiscal discipline." He noted: "I am very conscious that the present Chancellor is under exactly the same pressure."

This report is based on the transcript of the session which can be read here. Please note that these are uncorrected transcripts and neither peers nor witnesses had at the time of writing had the opportunity to correct the record so they may be subject to change. The drafting of this report was assisted by Claude.ai but it has been checked, edited and added to by CIOT's External Relations Team.