Chancellor must prioritise economic recovery over tax rises in Budget – IFS

The Chancellor must use the Budget to secure the UK’s economic recovery rather than implement substantial tax rises to try and fix the public finances, according to the Institute for Fiscal Studies (IFS).

The economic research institute suggested the Budget needs to announce targeted extensions in emergency support to households and employers over the coming months, as well as a plan for phasing them out. The IFS said the economy “cannot adjust and recover” until most of this support has been removed, warning that public finances are “not on a sustainable footing”.

Substantial tax rises should not be part of the coming Budget, the IFS added, suggesting that Rishi Sunak should only commit to permanent spending rises, or tax cuts, if he is “sure of an appetite for larger subsequent tax rises”.

There have been 13 major fiscal announcements since the previous Budget on 11 March last year. Those announcements have involved more than £250bn of additional spending, largely focused on supporting public services, jobs, businesses and incomes through the pandemic.

“This will be just Rishi Sunak’s second Budget, but his fifteenth major fiscal announcement,” commented IFS director, Paul Johnson.

“In it, he needs to strike a balance between continuing support for jobs and businesses harmed by lockdowns, and weaning the economy off blanket support which will impede necessary economic adjustment. Any significant continuation of the furlough scheme must be limited and carefully targeted.

“In the recovery phase he needs to support jobs and investment, but also crucially needs to recognise and address the multiple inequalities exacerbated by the crisis. Fiscal policy should lean against the effects of looser monetary policy which has again benefited the older and wealthier at the expense of the younger and poorer. And he will need to allocate substantial sums to help the health, education, justice and local government systems deal with ongoing consequences from the pandemic.”

The IFS also suggested that Sunak needs to set out plans for how to help the economy adjust to the triple challenges of Brexit, recovery from the COVID-19 pandemic, as well as the move towards Net Zero.

“It is possible that that growth will be fast enough that big fiscal deficits will largely dissipate of their own accord,” Johnson added.

“But that is not a central expectation: more likely we are on track for ongoing unsustainable deficits. For now, Sunak needs to focus on support and recovery. A reckoning in the form of big future tax rises is highly likely, but not as yet inevitable.”

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