Replace council tax with 1% property levy - NIESR

The government should scrap council tax and replace it with a 1% tax on the value of property, a leading thinktank proposes. Releasing its latest quarterly economic forecasts, the National Institute of Economic and Social Research, admitted that its idea would hit owners of expensive properties harder than a council tax would, but said this would be fairer.

"The people most affected would be those who bought expensive properties at the top of the market, such as the Blairs," said NIESR director Martin Weale, referring to the large house the prime minister and his wife bought in central London.

In 2004, it said, council tax yielded £20bn, whereas a 1% tax on property values would yield about £30bn, allowing, for example, stamp duty to be scrapped. Stamp duty inhibits the efficient use of housing by discouraging trading, it said.

The tax would cost the owner of an average house in Britain, which is worth about £160,000, £133 a month. Homeowners in the more expensive parts of the country, such as London, would pay much more. A house worth half a million pounds would cost its owner more than £400 a month. Mr Weale said the tax could be phased in over 10 years to prevent disruption to the housing market. If the government wanted to make the tax hit rich people harder, it could be set at 4% of the property value and then added on to the homeowner's annual income tax, he said. Thus higher-rate tax payers would pay more than those on lower incomes.

The report acknowledged that the plan would hit retired people who live in large houses and do not want to move. "On one hand, the point of the tax is to encourage people to use housing more efficiently and thus to use less [housing]. On the other, as the population ages, so the political difficulties arising from housing tax reform are likely to increase."

Sir Michael Lyons is carrying out a review for the government into local government financing. Mr Weale said that while a property tax would make good economic sense, a local income tax would be a better way of financing local government expenditure.

He also said NIESR considered the housing market to be overvalued to the tune of 20%, and a sharp fall in prices could not be ruled out, despite the market's recent stabilisation. The market was supported by low interest rates, both nominal ones set by the Bank - currently 4.5% - and long-term interest rates, set in the bond market. Yields on government debt hit a 50-year low last week.

Separately, Sir John Gieve, a civil servant who was recently appointed as a Bank of England deputy governor, told a parliamentary committee that he was encouraged by the fact that wage growth had remained tame, despite last year's jump in oil prices, though the monetary policy committee would have to keep an eye on gas prices which have surged in recent weeks.

"The key issue around the oil price hike is: is the impact on consumer prices a one-off, or is it getting embedded in expectations and wage behaviour?" Analysts said his remarks might indicate that he would be less inclined to raise interest rates than his predecessor Sir Andrew Large had been.