Britain’s leading public finance research body has warned of a “reckoning” ahead with higher taxes inevitable once the true economic cost of the coronavirus pandemic is known.
In an analysis of UK chancellor Rishi Sunak’s summer statement, the Institute for Fiscal Studies said that taxes would have to rise to fund the longer-term effects of borrowing about £350bn this year, about 18 per cent of national income.
Paul Johnson, director of the IFS, said it was impossible to know yet whether the chancellor had got right either the timing of the withdrawal of the furlough scheme or the scale of fiscal stimulus needed to aid recovery, but action to rectify huge holes in the public finances should wait for a few years.
Mr Sunak is minded to reject this advice, however, saying on Wednesday in his speech that the Autumn Budget was the moment to deal “with the challenges facing our public finances” and put them on a “sustainable footing” over the years before the next UK general election.
In its analysis of the summer statement, the IFS said that the level of help announced of up to £190bn was a “huge injection of support” and would leave the deficit close to £350bn this year which would be the highest annual level of government borrowing in UK history outside the two world wars.
In a separate analysis overnight, the Resolution Foundation noted that most of the injections of money had already been spent and the remaining stimulus package to boost the recovery was much smaller.
“The vast bulk of this spending went on unprecedented action to protect firms and families during the early phase of the crisis. The amount spent on stimulating the recovery is, in contrast, remarkably conventional,” said Torsten Bell, director of the Resolution Foundation.
Both organisations said that tax rises would be the natural consequence of the borrowing in 2020-21 because the economy was unlikely to recover sufficiently to repair the hole in the public finances on its own.
Continued social distancing, servicing the debt accrued during the crisis and more cautious behaviour among households and companies were likely to leave the economy persistently smaller than hoped before the crisis, hitting tax revenues and raising the underlying level of the deficit and public debt.
Mr Bell said that the government was likely to provide greater stimulus to boost the economy further later this year, adding to short-term deficits in the hope of reducing the longer term public finances problem, but tax rises were still likely to be necessary.
Mr Johnson said any tax decisions could wait until economists had a better idea of the longer-term prognosis. “The time to pay for all this will come. But not this year and not next. Our capacity to do so will depend above all on how the economy recovers,” he said.
“Let’s hold in the back of our minds that a reckoning, in the form of higher taxes, will come eventually.”
The IFS also said the job retention bonus of £1,000 for every furloughed worker that companies re-employed and retained until at least the end of January was likely to reward companies that would have hired them anyway. Even if that spending did not protect jobs, it would go to companies at the sharp end of the Covid-19 crisis, it added.