British finance minister Rishi Sunak needs tax rises of about £60 billion ($83.4bn) to ensure the government can balance the books following the Covid-19 crisis – but the March budget will be too soon to make a move, a UK think tank said on Tuesday.
The warning from the Institute for Fiscal Studies comes just two weeks before Mr Sunak unveils the Treasury’s plan to address the economic fallout from the pandemic, which has put the government on track to borrow £400bn this fiscal year.
Uncertainty over whether the pandemic will ease or flare up once again means Mr Sunak should focus his attention on targeted measures to prevent job losses and encourage business investment rather than raise taxes now, the IFS said.
“For now, Mr Sunak needs to focus on support and recovery. A reckoning in the form of big future tax rises is highly likely, but not as yet inevitable,” said IFS director Paul Johnson.
“In [the budget] he needs to strike a balance between continuing support for jobs and businesses harmed by lockdowns, and weaning the economy off blanket support which will impede necessary economic adjustment."
Britain's coronavirus-ravaged economy shrank 9.9 per cent in 2020, the biggest annual fall in output since modern records began.
Meanwhile, public sector borrowing soared to £34.1bn in December, taking government borrowing since the start of the financial year in April to a record £270.8bn, according to the Office for National Statistics.
Mr Sunak said the £280bn invested in protecting jobs and livelihoods across the country “has clearly been the fiscally responsible thing to do”.
Since taking office a year ago, Mr Sunak has delivered 13 emergency statements on the crisis, and with Covid-19 still dominating every aspect of life in the UK there are fears more support measures are needed.
While tax increases of £60bn a year equate to a nine-pence-in-the pound leap in income tax rates, any such revenue-raising measure would probably be spread across different taxes, the IFS said.
The IFS analysis, based on forecasts by Citigroup, warns that the scarring left by the deepest slump in three centuries may be worse than the Office for Budget Responsibility predicted in November.
While borrowing for 2020-21 will come in at about £400bn, a huge increase on the £55bn forecast for the year, under Citi’s scenario borrowing in four years’ time, 2024-25, would still be running at about £130bn – 30 per cent above the OBR’s November forecast.
"But there is tremendous uncertainty around this figure: borrowing would fall to pre-pandemic levels of around £50bn under Citi's much more optimistic scenario and would remain at around £190bn under their more pessimistic scenario," the IFS said.
Mr Johnson said it is possible that growth will be fast enough that big fiscal deficits will largely dissipate of their own accord. “But that is not a central expectation. More likely, we are on track for ongoing unsustainable deficits," he added.
Britain has suffered both one of the world’s worst Covid crises per capita, with more than 4 million infections and almost 122,000 deaths, and one of the poorest economic outcomes.
The economy is set to be 3 per cent smaller at the end of 2021 than before the pandemic struck, with a recovery hinging on consumer spending, according to Citi.
However, only richer households have benefited from a £125bn increase in savings during the crisis.
Looking ahead, the IFS said Mr Sunak will also have to pump more money into health, education, justice and local government to cope with the fallout from the pandemic and meet the longer-term challenges of Brexit and an economy aimed at net-zero carbon emissions.
Meanwhile, employee support programmes such as the furlough scheme should be phased out as restrictions ease.
However, rather than cutting it completely, the IFS recommended “a much more tightly targeted version” may be needed for sectors restricted for longer, such as aviation.
The IFS urged the government to expand an income support scheme for any self-employed workers that have missed out and called for the abolition of stamp duty land tax on property purchases.
"Stamp duty is a particularly damaging tax. Its abolition would stimulate the economy and could be introduced alongside a commitment to replace the forgone revenues with a reformed and revalued – and therefore fairer – and increased council tax," the IFS said.