Tuesday 13 October 2020 9:58 am

UK taxes could rise by more than £40bn, says IFS

The UK is set for years of higher debt and taxes as it recovers from the dual hit of the pandemic and Brexit, according to a leading think tank. 

The Institute for Fiscal Studies (IFS) published its annual Green Budget in association with investment bank Citi today, and warned that taxes will have to rise to more than £40bn a year to stop the national debt rising further. 

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The “huge economic trauma” triggered by the pandemic has led to record levels of government spending.

The think tank projects government borrowing to climb to £250bn which, at 17 per cent of GDP, is a level not seen before in the UK outside of the two world wars. 

The IFS has called for further policy action to “prevent debt from continuing to rise as a share of national income.” 

“Even if the government were comfortable with stabilising debt at 100 per cent of national income – its highest level since 1960 – it would still need a fiscal tightening worth 2.1 per cent of national income, or £43bn in today’s terms.” 

While tax rises or spending cuts may be necessary, the think tank warns that the high degree of uncertainty means “now is not the time to be announcing new targets, or the size, timing or nature of any fiscal tightening”. 

There is a “long road to economic recovery”, and while the economy has rebounded the momentum is unlikely to last. 

This is in large part due to waning consumer confidence as “lingering virus unease and broader uncertainty seem set to weigh on demand in the second half of 2020.” 

Households on average saved a record 28.1 per cent of their incomes during the second quarter, but the question is whether household confidence can drive a pick-up spending, which the IFS is doubtful of.

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While the coronavirus pandemic remains central to the IFS’ forecasts, the uncertainty surrounding Brexit “remains a substantial economic challenge for the UK”.

The think tank anticipates that a thin trade deal would leave the economy 2.1 per cent smaller next year, while a no-deal exit could see output depress by an additional 0.5-1.0 per cent.