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Big U.K. Tax Rises in Mid-2020s ‘All But Inevitable,’ IFS Says

Posted on Oct. 14, 2020

The U.K. government may need tax rises of over £40 billion a year by 2024-2025 “just to stop debt spiraling upwards,” but now is not the time for increases, the Institute for Fiscal Studies (IFS) said.

For the next 18 months at least, the government needs to focus on supporting the economy “almost irrespective of short-term impacts on borrowing,” the IFS said in an October 13 release as it presented its 420-page green budget, produced in collaboration with Citi Research and funded by the Nuffield Foundation. The report normally precedes the United Kingdom’s annual fiscal event, but the autumn budget was canceled in light of the continued uncertainty about the public finances.

A ‘Huge Spike’ in Borrowing

“We are heading for a significantly smaller economy than expected pre-COVID, and probably higher spending too,” IFS Director Paul Johnson said. “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.”

The COVID-19 pandemic and the public health measures implemented to contain it will lead to “a huge spike” in government borrowing this year, IFS Deputy Director Carl Emmerson and Research Economist Isabel Stockton noted. “We forecast the deficit to climb to £350 billion (17 percent of GDP) in 2020–2021, more than six times the level forecast just seven months ago at the March budget. Around two-thirds of this increase comes from the large packages of tax cuts and spending increases that the government has introduced in response to the pandemic. But underlying economic weakness will add close to £100 billion to the deficit this year — 1.7 times the total forecast for the deficit as of March,” they wrote. (Prior coverage of the March budget.)

Johnson noted that the end of the Brexit transition period on December 31 “will bring another set of economic disruptions.”

The low current cost of borrowing means that additional spending to help to deliver “a more complete recovery” from the coronavirus crisis would almost certainly be worth doing, the IFS said. “Despite the claim by Chancellor Rishi Sunak last week that he would ‘always balance the books,’ this will not happen, and he would be most unwise to try,” it added.

Local Alert Levels

The report coincided with the government’s announcement of a new, three-tiered system of local “COVID alert levels” in England. Areas with a “very high” level of infections will be subject to additional measures, including the closure of pubs and restrictions on travel. Details were set out in an October 12 release.

Sunak had told the Conservative Party conference on October 5 that the government has “a sacred responsibility to future generations to leave the public finances strong.” But he announced on October 9 that businesses legally required to close their premises during the winter because of coronavirus restrictions will receive grants to cover two-thirds of furloughed employees’ salaries.

The policy was billed as an extension of the job support scheme, which will replace the coronavirus job retention (or “furlough”) scheme starting on November 1.

The government’s economic package is “one of the most generous in the world,” Chief Secretary to the Treasury Steve Barclay told members of Parliament on October 13 in response to an urgent question regarding economic support for areas subject to additional restrictions.

“Why are workers in closed businesses expected to face poverty as a result of the businesses they work for doing the right thing?” asked Labour’s Shadow Chancellor of the Exchequer Anneliese Dodds. Scottish National Party MP Drew Hendry said, “Mass unemployment is a terrible policy,” and called on the government to extend support for furloughed workers to save jobs.

Barclay said 8.9 million people across the United Kingdom had benefited from the furlough scheme, and that more than half of those are “back in their jobs.”

Starmer Calls for ‘Circuit Break’

Later on October 13, Labour Party leader Keir Starmer claimed that the government had “lost control of the virus.” He called for a “two- to three-week circuit break” in England, arguing that minutes published on October 12 showed that the Scientific Advisory Group for Emergencies, which advises ministers, had recommended such a course of action in September.

The government is “no longer following the scientific advice,” Starmer said in a televised press conference. A circuit break would involve a temporary set of clear and effective restrictions designed to “reverse the trend of infections and hospital admissions,” according to Starmer. It would mean “only essential work and travel,” everyone who can work from home should do so, and nonessential offices should be closed, he said.

“Household mixing should be restricted to one household except for those who’ve formed support ‘bubbles.’ And all pubs, bars, and restaurants would be closed for two to three weeks — but compensated so that no business loses out because of the sacrifices we all need to make,” Starmer added.

The Guardian quoted Prime Minister Boris Johnson’s spokesman as saying that Johnson and Sunak had sought “a wide variety of scientific opinion.” Asked why the “circuit break” idea was not acted on, the spokesman said the Scientific Advisory Group for Emergencies documents also carried advice about seeking a broader perspective, the newspaper reported. 

COVID Fraud Hotline

The government has announced the launch of a new hotline to “stop fraudsters illegally targeting COVID stimulus schemes.”

“Many people work hard to pay their taxes, so it’s a gross injustice that fraudsters are shamefully taking advantage of measures set up to help people during the lockdown,” Cabinet Office Minister Julia Lopez said in an October 13 release. The initiative was launched in partnership with Crimestoppers, a charity.

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