The UK may need to raise an extra £40bn in a year in taxes just to stop “debt spiralling upwards”.
A study published by the Institute of Fiscal studies (IFS) has warned that lower tax revenues as a result of Covid-19 will place a strain on the British government in years to come.
The IFS has used a “central scenario” to explain that in four years time the economy “would be 5% smaller than was projected back in March”, as a result this would mean a £100bn hit to the public finances from lower tax revenues, even before any extra spending.
The report stated that “even a government content to keep debt constant at 100% of national income, and borrowing at around £80bn a year, would, under our central scenario, require a fiscal tightening worth around 2% of national income in 2024–25, over £40 billion in today’s terms”.
The IFS also said that “further adverse economic shocks, or a rise in interest rates not associated with stronger economic growth, would also add to pressures”.
The institute has also called for chancellor Rishi Sunak to not make “tax increases or any other form of fiscal consolidation”, instead the firm is calling for government policy to be redirected towards “supporting the economy” regardless of short-term impacts on borrowing.
It comes after Sunak said last week he would “promise to always balance the books” – a statement the IFS has dismissed adding that any attempt to do so would be “unwise”.
Paul Johnson, IFS director, said: “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”.
He added: “Unfortunately, none of this will be enough fully to protect the economy into the medium run. We are heading for a significantly smaller economy than expected pre-COVID, and probably higher spending too”.