Why Britain needs £40bn in tax increases to repair post-Covid public finances

Raising taxes will help the country avoid austerity cuts in the future, says think thank

The office buildings of the Canary Wharf financial district in London. The Resolution Foundation called for the government to increase taxes at the biggest rate since the early 1990s. AFP

Britain needs £40 billion in tax hikes to pump cash back into the Treasury to help repair the Covid-hit economy and avoid austerity cuts, according to a think tank.

The Resolution Foundation called for the government to increase taxes at the highest rate since the early 1990s, with those earning more than £19,500 targeted along with businesses.

"The Covid crisis is causing immense damage to the public finances, and permanent damage to family finances too, with pay packets on track to be £1,200 a year lower than pre-pandemic expectations," said Torsten Bell, chief executive of the Resolution Foundation.

In a 145-page report, the think tank said that household incomes were growing at a slower pace even before the pandemic, and look set to grow only 10 per cent during the 15 years from the start of the 2008-09 global financial crisis until 2023.

This compares to a 40 per cent growth in household incomes in the 15-year run up to the financial crisis.

The organisation wants improve living standards for those on low-to-middle incomes and warned that some households could lose more than £1,000 when certain benefits are reduced next April.

To counter this, Resolution wants a package of revenue-boosting tax rises, such as a 4 per cent tax on all incomes above £12,500, which coupled with cuts to National Insurance would generate £17bn in revenue. This would leave those earning less than £19,500 better off but increase taxes for the rest of the workforce.

The proposals also include freezing the personal tax allowance at £12,500 and the higher rate threshold at £50,000 while lifting corporation tax to 22 per cent from 19 per cent, which would generate £10bn. The think thank also proposed wealth taxes, including a 1 per cent council tax rise for those whose homes are worth more than £2m.

In total, the Foundation’s plans would increase the tax burden to 40 per cent of gross domestic product, however, it said this should wait until 2023 to allow the country to recover from the crisis.

“While the priority now is to support the economy, the permanent damage to public finances mean taxes will rise in future. But which taxes those will be, like which Brexit we can expect, are questions the Chancellor left for another day," Mr Bell said.

The recommendation comes a day after UK Finance Minister Rishi Sunak unveiled a one-year spending review and said Britain's economy will contract 11.3 per cent in 2020 – the most in more than 300 years – because of the pandemic.

Mr Sunak rolled out cuts to foreign aid, froze public sector pay and said unemployment could surge to 2.6 million by mid-2021.

Mr Sunak said on Thursday that the path for the public finances set out by official forecasters was not a sustainable one, the closest he has come to acknowledging that taxes will need to rise.

"The forecasts that were set out yesterday show us on a path where that (borrowing and debt) continues to be at a very elevated level, so that's not a sustainable position," he told the BBC.

He declined to commit specifically to tax rises, saying any decision would need to wait for his annual budget statement due early next year.

"Once we get through this and we have more certainty about the economic outlook, we'll need to look at how we can make sure we have a strong set of public finances," Mr Sunak said.

Mr Sunak said on Thursday that the path for the public finances set out by official forecasters was not a sustainable one, the closest he has come to acknowledging that taxes will need to rise.

"The forecasts that were set out yesterday show us on a path where that (borrowing and debt) continues to be at a very elevated level, so that's not a sustainable position," Mr Sunak told the BBC.

He declined to commit specifically to tax rises, saying any decision would need to wait for his annual budget statement due early next year.

"Once we get through this and we have more certainty about the economic outlook, we'll need to look at how we can make sure we have a strong set of public finances," he said.