Tories may have to raise taxes to help repair coronavirus-ravaged finances, economists warn

Boris Johnson is likely to have to break his manifesto pledge not to raise income tax, VAT or national insurance to help repair Britain’s coronavirus-ravaged finances, economists have said.

Philip Aldrick, Economics Editor | Steven Swinford, Deputy Political Editor 

During the general election Mr Johnson promised to retain the triple lock on tax increases, severely limiting the government’s room for manoeuvre as it seeks to stabilise national debt. The Institute for Fiscal Studies (IFS) said that the government would need to find £40 billion worth of savings or tax rises.

Rishi Sunak, the chancellor yesterday declined to say that he stood by the triple lock on taxes, adding that he would not discuss future fiscal policy. By contrast,the prime minister’s official spokesman said that Mr Johnson stood by the manifesto pledge on the tax lock.

Carl Emmerson, deputy director of the IFS, said: “I wouldn’t be surprised if that was part of a package of tax-raising measures. I appreciate it would break a manifesto commitment but there are other manifesto commitments that are being broken too. Clearly Covid is a very big shock that wasn’t anticipated last year.”

Council taxes are likely to rise by an average of £70 per household after local government budgets were squeezed under “another bout of austerity” for some departments, the IFS added. It also raised questions about how to pay for the separate pensions triple lock.

Paul Johnson, the IFS director, said the £27 billion of tax rises implied by the Office for Budget Responsibility’s forecast understated the true challenge the government faced. Decisions not to top up NHS spending beyond next year, to scrap the temporary £6 billion increase in universal credit and to lower day-to-day public service spending by £10 billion a year look ambitious, the IFS said.

“Put these pressures together and . . . the chancellor would eventually need about £40 billion in today’s terms,” Mr Johnson said. “The chancellor will have to get debt at least to a level where it is not on an upward trajectory, and that will probably require some tax rises in the early middle years of this decade.”

Debt is forecast to rise as a share of GDP every year of the parliament, which is widely seen as unsustainable.

The IFS director added that the spending review was “pretty austere” because it lowered departmental spending from 2022 onwards by £10 billion compared with March projections, with the pain landing hardest on unprotected departments such as local government, transport and prisons.

Torsten Bell, director of the Resolution Foundation think tank, described the reduction in spending relative to previous plans, as “a way of the chancellor starting to change the path of the public spending tanker” to realign it with a smaller economy.

He said, however, that Britain’s coronavirus recovery could be better than expected as households spend their pent-up savings having a good time like in “the roaring Twenties”.

He also said that the prime minister could continue to claim that austerity was over because overall spending on day-to-day public services was “roughly back to pre-financial crisis levels”.

The IFS suggested that changes may be needed to the state pension. It is set to rise by 6 per cent above inflation by 2025, adding £6 billion to the cost to the exchequer, raising questions about the pledge to uprate it in line with the higher of inflation, average earnings or 2.5 per cent.

Households face a £1,200 cut in pay by 2025 relative to previous expectations, the Resolution Foundation said. Average pay is about £30,000.

Analysis of the OBR forecasts showed that household incomes will have grown by only 10 per cent in the 15 years since the 2008 financial crisis, compared with 40 per cent in the previous 15 years.

Mr Bell said: “The Covid crisis is causing immense damage to the public finances, and permanent damage to family finances too, with pay packets on track to be £1,200 a year lower than pre-pandemic expectations.

“The pandemic is just the latest of three ‘once in a lifetime’ economic shocks the UK experienced in a little over a decade, following the financial crisis and Brexit. The result is an unprecedented 15-year living standards squeeze.”