LONDON (Reuters) – British finance minister Rishi Sunak might have to raise a hefty 60 billion pounds ($83 billion) more in taxes each year to pay for the COVID-19 hit to the public finances, but his March 3 budget is too soon for such a move, a think tank said.
Uncertainty about whether the pandemic would fade meant Sunak should target his support for jobs and encourage business investment, the non-partisan Institute for Fiscal Studies said.
“A reckoning in the form of big future tax rises is highly likely, but not as yet inevitable,” IFS Director Paul Johnson said.
Sunak has authorised extra spending and tax cuts worth over 280 billion pounds in this financial year, putting Britain on course for a 400 billion-pound deficit, its biggest ever outside the two world wars.
Johnson should Sunak should start weaning the economy off his blanket support and focus on helping younger and poorer people excluded from the jump in savings reported by other households which benefited from furlough wage subsidies.
Sunak will also have to pump more money into health, education, justice and local government to cope with the fallout from the pandemic and meet the challenges of Brexit and climate change, the IFS said.
To raise 60 billion pounds more in tax a year – enough to balance day-to-day government spending – would be equivalent to a nine-pence-in-the pound leap in income tax rates although it would probably have to be spread across different taxes.
Prime Minister Boris Johnson’s Conservative Party has ruled out raising the main rates of income tax, value-added tax or National Insurance.
But the IFS said those were the taxes that would probably account for the bulk of any revenue-raising push.
“It’s going to be difficult if you tie your hands and do nothing there,” IFS Deputy Director Helen Miller said.
She said Sunak should fix “broken” parts of the tax system such as wide-ranging exemptions from inheritance tax, capital gains tax breaks and England’s council tax on households, which is based on 30 year-old property values.
The IFS’s Johnson said a one-off wealth tax, as suggested by an influential lawmaker on Monday, might ease inequality issues but fixing the existing problems with inheritance and capital gains taxes would have a longer-term impact.
Forecasts drawn up for the IFS by U.S. bank Citi estimated the budget deficit would fall to 130 billion pounds by the 2024/25 financial year, but still more than double its pre-pandemic size.
The IFS urged Sunak to keep a 20 pound increase to weekly welfare payments which is due to end on March 31, to help lower-earning self-employed people and to focus wage support for workers in sectors such as aviation and airports.
($1 = 0.7191 pounds)
(Writing by William Schomberg, editing by David Milliken)