£40bn a year tax rises needed to stop debt spiralling, IFS warns

Hiking taxes too soon will stunt the economic recovery, the Institute for Fiscal Studies said

Taxes may have to rise more than £40bn a year to stop Government borrowing spiralling out of control, the Institute for Fiscal Studies has warned.

The think-tank said the deficit this year was set to reach levels not seen outside the two world wars due to Covid-19.

In its annual Green Budget, the IFS said over the medium term, taxes would almost certainly have to rise, noting that the Government had increased spending on day-to-day public services by £70bn in response to the pandemic.

However, IFS economists emphasised that hiking taxes too soon would stunt the recovery.

With the economy shrinking due to lockdown measures – under its "central scenario", the IFS said the economy would be 5pc smaller in four years than was projected in March – the Government faces a £200bn hit to tax revenues.

The Chancellor Rishi Sunak promised the virtual Conservative Party conference last week that the Government would “always balance the books”.

However, Carl Emmerson, deputy director of the IFS, said: “A safer bet would be to say that this Conservative government will never balance the books and actually I wouldn’t advise that they try...any time soon.”

Paul Johnson, the IFS director, described government briefings in August and September that tax rises were imminent as “extraordinary”.

“Even back then, that felt entirely inappropriate as a way of thinking about what might be in a budget this year, possibly even by this time next year,” he added.

The IFS said even if ministers were content to keep debt constant at 100pc of national income, and borrowing at about £80bn a year, that would still require a "fiscal tightening" of about 2pc of national income in 2024-25 – more than £40bn in today's terms.

The report said while every major economy apart from China had seen GDP shrink in the first part of the year, the UK along with Spain had suffered the biggest fall, with a 20pc drop – twice that of the US or Germany.

It added that Brexit remained "a substantial economic challenge" for the country, with a "thin" trade deal forecast to shrink the economy 2pc compared to if Britain stayed in the customs union and single market, or by another 0.5-1pc smaller if the UK trades with the EU on World Trade Organization terms.

"The majority of the economic costs associated with Brexit still lie ahead, and are likely to be felt quite quickly and sharply after the transition period ends," the report said. "These effects will likely hit employment, as well as investment."

Asked whether the Johnson government was becoming more European having left the EU, Paul Johnson said: “I certainly see something of a change from Thatcher, and to a significant extent, the Blair and Cameron consensus, on [state aid]. 

“At least in the upper echelons of the Conservative government at the moment, there seems to be much more interest in a more interventionist state policy.”