Rishi Sunak’s March Budget should announce “well targeted” extensions to current emergency Covid support measures and avoid any tax rises, according to one of the UK’s largest economics think tanks.
The Institute for Fiscal Studies (IFS) will today urge the chancellor in an online event to “secure the UK’s economic recovery” and “set out plans for how to help the economy recover and adjust to a new normal”.
The influential institute said the chancellor should extend the furlough scheme, temporary VAT cut for hospitality and tourism businesses and business rates holiday, but also set a firm date for them to end.
Researchers from the IFS will also say that Sunak should avoid any tax rises in the 3 March Budget in the face of rumours the chancellor will hike capital gains tax.
However, the IFS also warns that “sizeable net tax rises” will be needed at some point to pay for the government’s near £300bn in Covid spending.
IFS director Paul Johnson said the chancellor will need 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”.
“In all this he is facing huge economic uncertainties as the economy adjusts to the triple challenges of Brexit, recovery from Covid and the move to Net Zero. It is possible that that growth will be fast enough that big fiscal deficits will largely dissipate of their own accord,” he said.
“But that is not a central expectation: more likely we are on track for ongoing unsustainable deficits. 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.”
The Office for Budget Responsibility is predicting a £394bn Budget deficit this fiscal year, which will be seven-times larger than the 2019-20 deficit.
This comes to 19 per cent of annual GDP, which makes the deficit equivalent to the UK’s war-time spend in 1944/45.
Sunak has said on multiple occasions that the UK must return to “sustainable finances”, prompting speculation that he will look to raise taxes this year.
Any move to raise taxes, particularly on wealth and capital gains as has been speculated, would anger the Tory grassroots supporters.
Mark Littlewood, director general at free market think tank the Institute of Economic Affairs, said “the government should go further in giving British businesses assurances that tax hikes are not inevitable in the longer term”.
“The UK has reached its taxable limit: over the medium term, the public finances are going to need to be repaired by expenditure reductions not tax rises,” he said.
Responding to the IFS, a Treasury spokesperson said: “We’ve invested more than £280bn throughout the pandemic to protect millions of jobs and businesses – and extended our self-employed and furlough schemes through to April so that people have certainty that help is in place.
“At the upcoming Budget we’ll outline the next stages of our Plan for Jobs to support businesses and families across the UK. That has been our priority throughout the past year and it will be the priority for the year to come.”