UK 'needs £60bn tax hikes' to plug black hole left by COVID-19

Tom Belger
·Finance and policy reporter
·3-min read
Chancellor Rishi Sunak will present the UK government's 2021 Budget in early March. Photo: Xinhua via Getty Images.
Chancellor Rishi Sunak will present the UK government's 2021 Budget in early March. Photo: Xinhua via Getty Images.

The UK government has been warned it could be forced to hike taxes by £60bn ($83.4bn) a year to fill a black hole in the public finances caused by COVID-19.

A leading think tank said the UK will likely face a "reckoning" with the economic cost of COVID-19 in the years to come, in the form of tax increases just to cover day-to-day spending.

New analysis suggests the long-term economic damage of the pandemic and higher spending pressures will leave "ongoing unsustainable deficits" in the public finances even as the economy recovers. GDP is expected to still be 3% below its pre-virus level at the end of the year.

Borrowing in 2020-21 will reach its highest ever share of national income outside the two world wars, according to new analysis by the Institute for Fiscal Studies (IFS) and Citi Research. Even in 2024, the figures suggest borrowing between £50bn and £190bn will be needed to fill a funding gap in everyday spending.

Watch: Why tax rises may be inevitable in Britain

READ MORE: Pressure on UK government to map 'clear route out of the crisis'

The IFS argues the UK chancellor Rishi Sunak should use his March budget to prioritise efforts to drive recovery over plugging deficits in the short-term, however.

It says interest rates are "extraordinarily low" because of measures taken by the Bank of England, and the government should "lock in" such levels by shifting borrowing towards more long-dated bonds.

It estimates £60bn of tax rises "could plausibly be required" in the longer term, but said high uncertainty over the economy's future meant the actual figure could prove considerably lower or higher.

Watch: Why tax rises may be inevitable in Britain

"Tax rises should not be implemented any time soon. But the chancellor should be preparing for them, and certainly should not be engaging in any permanent spending increases (or for that matter tax cuts) unless he is sure of an appetite for larger subsequent tax rises," said IFS researchers in a statement.

READ MORE: Bank of England says UK economy 'like a coiled spring'

The IFS also called for Sunak to use the budget to announce:

  • A £20-a-week top-up to benefits, introduced last year but due to expire in March, to be extended at a £6.5bn cost. "Given that basic support for the (childless) unemployed has not risen in 50 years as earnings have more than doubled, and is much less generous than in many comparable countries, there is a case for maintaining this increase."

  • Stamp duty on property transactions to be abolished, replaced by a "reformed and revalued," higher form of council tax.

  • The furlough scheme to be extended as long as restrictions last to safeguard jobs, but no longer as the IFS suggests it could "choke off recovery." Longer-term support may be needed for the aviation sector, however.

  • Workers excluded from crisis income support schemes so far to be included, such as the newly or part-time self-employed and workers previous on more than £50,000 a year.

  • "Billions of additional NHS funding" to clear a backlog of non-coronavirus NHS care, with 5.3 million fewer hospital referrals between April and December than a year earlier.

  • Support for the court system to clear a backlog of cases, education to offset the impact of school site closures, and local government to cover wide-ranging extra costs expected to total more than £2bn a year by 2025.

  • Cuts to employer national insurance contributions to boost short-term job creation, and a hike in employee and self-employed national insurance contributions subsequently.

The Treasury has been approached for comment.