Labour's favourite think-tank backs £6bn tax raid on pensioners and landlords to fill 'huge hole' in public finances

Labour's favourite think-tank has backed a £6 billion tax raid on pensioners and landlords to help fill a 'huge hole' in the public finances, declaring: 'Somebody is going to have to pay for it.'

In a report two weeks before the Budget, the Resolution Foundation also suggests targeting homeowners, banks, and wealth.

Yet the Left-wing think-tank says benefit claimants cannot be expected to face cuts - arguing there is 'little fat to trim' from the welfare bill.

The report estimates that Chancellor John Healey's Budget headroom has fallen from £24 billion to £12 billion amid a 'perilous' economic backdrop.

It also argues that billions in extra cash will be needed for defence spending and cost of living help - though the latter should be targeted at those on benefits or lower incomes leaving squeezed middle earners to fend for themselves.

The think-tank's report says: 'Conflict in the Middle East has left a huge hole in the UK public finances.'

It revives the idea of a tax switch in which income tax goes up by 2p in the pound while national insurance is cut by 2p.

The proposal would leave tax on workers' income unchanged but hit the self-employed, landlords and pensioners - who are subject to income tax, but not national insurance.

'That may be controversial, but if major new expenditure is to be funded, then somebody is going to have to pay for it,' the report said.

'Announcing such a move would go a long way to rebuilding confidence in our public finances.'

The findings will be studied closely in Whitehall where a number of Labour ministers and officials are alumni of the Left-wing Resolution Foundation.

Among its recommendations is a reform of capital gains tax to raise £4 billion by ending exemptions for the owners of assets when they die or leave the country.

And reducing the threshold at which small firms must pay VAT could bring in £2 billion.

A similar sum could come from charging national insurance on partnership income – for example, for lawyers who are partners in a law firm.

Other ideas for raising billions include higher bank taxes, a dividend tax hike, or reducing the £2 million threshold at which the new mansion tax will start to bite – though reports suggest such a measure has been ruled out.

The report argues that any reforms to cut Britain's benefits bill 'must not be rushed and so cannot be made in time for the Budget'.

It adds: 'There is little fat to trim from the overall spend without damaging living standards, risking a political backlash or both.'

The report suggests a £2bn package of help for households struggling to pay energy bills as they surge past £2,000 – but only for the worst off. And it calls for a £2.3 billion boost to housing support.

Mr Healey's options have been narrowed as the Iran war drives up inflation and drives turbulence in bond market, which has sharply increased the cost of borrowing.

That is likely to reduce the headroom – the buffer against meeting public finance rules – which is available to the Chancellor.

James Smith, chief economist at the Resolution Foundation, said it had left the Chancellor with a 'tough first act'.

He added: 'War in the Middle East has likely halved the level of headroom he has against his fiscal rules. And with markets closely scrutinising our fiscal position, he will need to deliver a robust Budget to show he's serious about sound public finances.'