Britain facing ‘£40 billion a year tax rises’ within five years as borrowing reaches levels not seen since second world war
Britain is facing “£40 billion a year tax rises” within five years as borrowing reaches levels not seen since the second world war.
The Institute for Fiscal Studies (IFS) has today warned the economy could still be suffering the effect of coronavirus in five years time, with borrowing soaring to £200 billion.
In a report that will spark a series of issues for the Chancellor Rishi Sunak, the think tank also claimed unemployment could hit 8.5 per cent in the first half of 2021, seeing the greatest number of people out of work since the early 1990s.
Speaking ahead of the publication of the 2020 IFS Green Budget, IFS Director Paul Johnson said: “We are heading for a significantly smaller economy than expected pre-Covid, and probably higher spending too.
“Without action, debt – already at its highest level in more than half a century – would carry on rising.
“Tax rises, and big ones, look all but inevitable, though likely not until the middle years of this decade.”
Published today, the IFS report claims things are even worse than expected, with the economy in four years’ time likely to be 5 per cent smaller than was projected back in March.
This could mean a £100 billion hit to the public finances from lower tax revenues, or even £200 billion in that year alone if the impact of coronavirus linger longer than expected.
The stark predictions do not even take into account any extra coronavirus spending, such as funding boosts for the NHS, social care and track and trace etc.
So far the Government has already spent £70 billion on day-to-day public service spending in response to the pandemic.
Mr Johnson explained: “This government has chosen to pump an additional £200 billion into the economy to support jobs, businesses and incomes this year.
“That is a level of fiscal support unprecedented in peace time.
“For now, with borrowing costs extremely low, Mr Sunak shouldn’t worry unduly about the debt being accrued as a result. It is necessary.
"Well directed investment spending over the coming period could help with growth and hence, eventually, the fiscal numbers.
“Unfortunately, none of this will be enough fully to protect the economy into the medium run.”
The IFS explained by 2024-25 the UK would likely need fiscal tightening of 2 per cent of national income- coming in at £40 billion.
They say there could be another £36 billion on top of this caused by an ageing population, with other factors such as a rise in interest rates making things even worse.
Christian Schulz, Chief UK Economist at Citi, who also worked on the report, explained the recovery would be harder as the UK handled the crisis worse than other countries.
He said: “The Covid-19 pandemic triggered historically deep recessions around the world in the first half of 2020.”The end of the lockdowns has allowed a big rebound in activity, but it will take a year or two to reach pre-crisis levels of output even if governments avoid a new round of disruptive containment measures.
“The UK struggled longer to contain the first wave of the pandemic, experiencing a longer lockdown and a deeper recession than most other major economies.”Mr Schulz also warned any recovery would take longer due to Brexit, with a trade deal with the EU expected to leave the UK economy around 2 per cent smaller in 2021, with no-deal potentially slashing another 1 per cent.
He explained: “Structural vulnerabilities of the UK economy, such as its large service sector and the high degree of urbanisation, suggest it will also underperform in the rebound.
“In this situation, leaving the EU Single Market and Customs Union, with a rudimentary trade deal or with no deal at all, makes us even more pessimistic about the chances for a V-shaped recovery.”
The IFS says this will have disastrous consequences on employment numbers, which have already plummeted with the UK likely to be more than 6 per cent smaller year on year in the final quarter of 2020.
It is believed 700,000 jobs have already gone since August, not taking into account the end of the furlough scheme.
The IFS has now warned Mr Sunak not to make any drastic cuts yet, urging him to focus on supporting the economy irrespective of the impact on borrowing for the next 18 months at least.
They dismissed his vow to “always balance the books”, insisting this not only won’t happen but it would be “unwise to try”.
This was backed by the SNP, with Shadow Chancellor Alison Thewliss MP warning “it is not the time for tax increases or austerity.”She said: “We are in the middle of a global health pandemic and on a Brexit cliff-edge.
“The priority for the next 18 months must be to support the economy, prevent soaring unemployment and protect people’s incomes – irrespective of short-term impacts on borrowing.
"That includes extending the furlough scheme and supporting growth by devolving financial powers to Holyrood and introducing the £80 billion emergency fiscal plan the SNP has been demanding for months.
“If the Tory government continues to withhold these crucial funds and powers, which other countries are already utilising, Scotland’s recovery will be put at risk – threatening more job losses and budget cuts, and devastating our economy.”
Lib Dem Treasury spokesperson Christine Jardine called for a “laser-like focus” and suggested investment was the solution.
She said: “To deal with the long-term effects of the crisis we need to build a new economy, based on new, green technologies.
“Government should be strategically investing billions in the industries that will grow our economy and allow us to tackle the climate emergency.
“Just as crucially, it’s never been as vital to get the best possible trade agreement with the EU.
“The Government cannot be allowed to risk a double-whammy of Covid-19 and EU-trade crises, which would decimate the UK’s economic prospects.”
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