Govt may need to increase taxes by £40bn a year to stop debt spiralling

The government will need to raise taxes by more than £40bn a year by 2025 to prevent debt spiralling upwards, according to analysis from the Institute of Fiscal Studies (IFS).

The think tank suggested that government borrowing this year will reach a level “never before seen in the UK” outside of the two world wars.

The IFS has predicted that the economy in four years’ time would be 5% smaller than was projected back in March, meaning a £100bn hit to public finances from lower tax revenues before any extra spending.

In more “pessimistic scenarios” and with the effects of COVID-19 lingering for longer, the IFS stated that government borrowing could exceed £200bn in that year.

With expected tax rises a “likely consequence of a smaller economy”, as the IFS forecasts suggested, its analysis also said that now is not yet the time for tax increases or any other form of fiscal consolidation.

Over the next 18 months, the IFS said that government policy should be focused on supporting the economy, irrespective of the short-term impacts on borrowing. 

“This government has chosen to pump an additional £200bn into the economy to support jobs, businesses and incomes this year,” said IFS director, Paul Johnson.

“That is a level of fiscal support unprecedented in peace time. For now, with borrowing costs extremely low, Rishi Sunak shouldn’t worry unduly about the debt being accrued as a result. It is necessary. Well directed investment spending over the coming period could help with growth and hence, eventually, the fiscal numbers.

“Unfortunately, none of this will be enough fully to protect the economy into the medium run. We are heading for a significantly smaller economy than expected pre-COVID, and probably higher spending too. Without action, debt – already at its highest level in more than half a century – would carry on rising. Tax rises, and big ones, look all but inevitable, though likely not until the middle years of this decade.”

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