UK Chancellor Rishi Sunak plans to raise income tax by £6 billion ($8.36bn) as he looks to “level” with the public on the state of the country’s finances and plug a £43bn-a-year black hole.
Mr Sunak will freeze the income tax thresholds of £12,500 and £50,000 for at least three years, according to The Sunday Times, with the idea that putting the brackets on hold rather than increasing them will result in more people paying tax as wages increase.
The move would push 1.6 million people into a higher tax bracket, including 800,000 who currently pay no tax at all.
While Mr Sunak would not elaborate on his tax plans in a series of television interviews on Sunday, he confirmed that he would unveil further Covid-19 economic support measures that align with the Prime Minister Boris Johnson’s road map out of lockdown, which is set to end on June 21.
“Coronavirus has had an enormous toll on our economy, and I want to level with people about that, about the problem that causes and the challenges it presents us with, and be honest about our plan to address those,” said Mr Sunak.
The UK has spent about £300bn on coronavirus support since the crisis began and Mr Sunak said this presents a “challenge” for the country’s public finances.
“If we do not do anything, borrowing will continue to be at very high levels. Even after we have recovered from Covid, debt will continue to rise,” he said.
Mr Sunak now needs to raise more than £40bn to plug the public finance gap while also protecting the government from the threat of rising interest rates on borrowing.
"I remain committed to doing whatever it takes to protect people and businesses."
— Trevor Phillips on Sunday (@RidgeOnSunday) February 28, 2021
On whether the furlough scheme will be extended for workers in Wednesday's Budget, @RishiSunak says "we are going to be there to support them"
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Before the crisis, the 2020/21 budget deficit was set at £68bn. However, it is now expected to be £370bn, far exceeding the previous peak of £158bn in between 2009 and 2010 after the global financial crisis.
In January alone, public sector borrowing rose by £8.8bn, resulting in the first January deficit for a decade and the highest figure for the month on record, highlighting the challenge as he prepares for the budget on March 3.
This takes Britain's debt mountain to £2.1 trillion, equivalent to 98 per cent of GDP.
Mr Sunak will unveil £5bn of additional grants to help businesses hit hard by pandemic lockdowns in his budget statement next week, with shops, bars, hotels, restaurants, gyms and hair salons among nearly 700,000 companies eligible for new direct cash grants of up £18,000.
He also pledged to keep supporting employees and jobs as the economy reopens.
“I said at the beginning of this crisis that I would do whatever it took to protect people, families and businesses through this crisis,” he said, when asked whether the furlough programme would be extended beyond the end of April. “I remain completely committed to that.”
While the priority is to continue supporting the economy, Mr Sunak said he was only able to respond aggressively to the crisis because of the strength of the country’s public finances.
While historically low interest rates mean Britain’s debt level is manageable for now, Mr Sunak issued a warning on the risk that future interest rate rises pose to the Treasury.
“Interest rates have been at very low levels, which does allow us to afford slightly high debt levels, but that can always change,” he said
“I want to make sure when the next chancellor comes along, whoever’s sitting here can do the same thing that I’ve done. They need strong public finances to do that.”
Mr Sunak told the Conservative Party conference last year that “this Conservative government will always balance the books”, while the Tory manifesto included a pledge not to raise income tax, National Insurance contributions or VAT.
While Mr Sunak would not confirm on Sunday whether he would break that pledge, a freeze on income tax thresholds gets around it, as more people at the lower end of the income ladder will pay tax for the first time and more people earning above £50,000 will begin paying the higher rate of 40 pence.
Mr Sunak stressed that support measures and addressing fiscal consolidation are “compatible” for his budget.
