Tax  

‘Genuinely surprising’ if UK avoids tax rises

‘Genuinely surprising’ if UK avoids tax rises

It would be “genuinely surprising” if the UK escaped higher taxes in the near future to deal with the economic consequences of the coronavirus crisis, experts have said.

Speaking at a Treasury select committee hearing this afternoon (February 3), Paul Johnson, director at the Institute for Fiscal Studies, said it was “pretty unlikely” that taxes would not rise as a fraction of national income.

He explained: “It is probable the economy will be smaller in three or four years’ time than it would have been without the pandemic, so there is less tax revenue.

“There is also a higher level of spending demand. It is unlikely we will accept the same level of spending on health, education and social care than before the pandemic.

“Thirdly, we’ve always known the costs of health and pensions would rise reasonably significantly over the next decade. So I would be genuinely surprised if in five years' time, taxes were not higher.”

Vicky Price, board member for the Centre for Economic and Business Research, agreed.

She added that the UK was facing a combination of factors that would reduce the growth rate of the economy in the future, which, combined with pressures on public services, would result in higher taxes.

Ms Price said: “If you get a combination of low investment, lack of direct foreign investment [due to Brexit] and the slowdown in the economy translating to firms disappearing and banks in difficulty [...] then you reduce the growth rate.

“There was already weakness in the economy [before the pandemic] so the likelihood without tax increases seems pretty low.”

Others were less sure, however. Julian Jessop, fellow at the Institute for Economic Affairs, said if the economy rebounded as strongly as he expected and if public finances continued to beat the Office of Budget Responsibility’s forecasts, there would be no need for taxes.

He added that the OBR had released three scenarios for the economy and that in the upside, there was no economic scarring and debt fell sharply, so “in that scenario, there is no need for tax rises”.

Although the experts were split on the eventual need for an increase in taxes, they were united on the fact these were unlikely to occur in the March budget, instead suggesting the chancellor would focus on the immediate issues surrounding coronavirus support.

Torsten Bell, chief executive of the Resolution Foundation, said: “It is clear the focus will end up being about taking the decisions that are outstanding regarding the final phase of support for households and firms — so universal credit and the furlough scheme, and what to do about loans to firms.

“In practice, even if the rhetoric is focused on the long-term, really this will be a budget for the next five months.”

Mr Johnson agreed, adding that Rishi Sunak was also likely to focus on supporting the labour market for a world that moves on from restrictions, whether that be bonus schemes for returning to work, additional training or green investments.