Tax rises will be needed to deal with economic fallout from pandemic, government told

Chancellor Rishi Sunak may have to delay revenue-raising increases for two years to avoid stifling recovery

Andrew Woodcock
Political Editor
Monday 31 August 2020 08:19 BST
IFS director Paul Johnson warns of significant rises in income tax, national insurance and VAT

“Hefty” tax rises will be needed to deal with the economic aftermath of the coronavirus pandemic, but chancellor Rishi Sunak will have to delay as long as two years to introduce them to avoid choking off recovery, a respected thinktank has said.

And the director of the Institute for Fiscal Studies, Paul Johnson, said that Mr Sunak will have to hike rates of the most high-profile taxes, like income tax, national insurance and VAT, in order to raise the “really serious amounts of money” needed to fill the black hole in state finances.

Rises in levies paid by all would be politically perilous, as their impact would be felt in voters’ pockets just as Boris Johnson is preparing for the general election scheduled for 2024.

Reports that the chancellor is considering a £30bn tax raid in November’s Budget have sparked alarm among business leaders and MPs, with the British Chambers of Commerce warning that premature rises in corporation tax or capital gains levies could “hamstring” the recovery.

Treasury sources refused to comment on the claims, insisting that they would not discuss the content of the Budget in advance of its delivery.

But Paul Johnson said the all-but-inevitable tax rises are likely to be delayed for as much as two years to allow the economy time to get back on its feet following the massive blow to GDP caused by Covid-19 this year, when the economy shrank by a historic record of 20.4 per cent in the second quarter.

The IFS chief told BBC Radio 4’s Today programme: “At some point he is going to have to raise taxes, but probably not at this Budget and probably not from next April, when tax rises would usually come into effect.

“I think for the next year or 18 months, depending of course on what happens with the coronavirus, the real focus is going to be on supporting the economy - not so much because we're borrowing a huge amount this year but more because the economy looks like it's going to be smaller in the long run and therefore our borrowing is going to be higher in the long run and we're probably going to need to spend more on things like health and social care.

“I think he is going to need at some point to look at some pretty substantial tax rises.”

The think tank director said that business groups and MPs who warned of the danger of stifling recovery with tax rises now were “probably about right”, pointing out that the crash of 2008 was followed by “a good couple of years” of increased government spending and temporary tax cuts to stimulate the economy.

“I think we should be looking probably initially at a couple of years where the government is supporting the economy and only really when the recovery is fairly clearly under way and the economy is getting back closer to normal will we be looking at tax rises.

“But as I said I think we are going to need some pretty hefty ones.”

Paul Johnson
Paul Johnson

Sunak is unlikely to be able to get away with rises only in levies on business, like corporation tax, which are little noticed by the general public, suggested Paul Johnson. And the chancellor has little scope to cut pension tax reliefs without extending the pain beyond the very rich to the affluent middle classes who provide the Tories’ bedrock electoral support.

“Pension tax relief reductions have been one of the biggest tax increases we've seen over the last decade, particularly for the highest earners,” he said. “The problem for the government is that further reductions in that begin to hit people on good earnings but not right at the top, people on £50,000, £60,000, £70,000 a year maybe, core Conservative voters.

“But if you want really serious amounts of money, then you're looking at doing things which are going to make the geese hiss - increasing VAT, National Insurance, income tax rates. If you want really big amounts of money, those are the places you need to look.”

Unconfirmed reports in the Sunday Times this weekend suggested that the chancellor is mulling in rise in corporation tax from 19 to 24 per cent at a cost to business of £12bn, while capital gains could be levied at the same rate as income tax.

But BCC director general Adam Marshall warned that piling taxes on businesses would be “a really damaging mistake” by sending out the message that "it's not a good environment to invest in, it's not a good environment to take a risk"

Warning that early tax rises would "hamstring the recovery”, Dr Marshall said: ”I very much hope that this is the Treasury flying kites rather than settling policy, because we do not want to make a choice between a strong recovery with lots of investment and risk-taking by businesspeople or a short-term repair of the public finances."

Conservative backbencher Marcus Fysh said tax increases would be the "wrong response" to the coronavirus crisis and urged the prime minister to resist them, warning: "We need to help the economy, not strangle it. These mixed messages are in themselves damaging and must stop."

And former cabinet minister John Redwood told the Daily Telegraph: "You cannot tax your way to faster growth and more prosperity. We need policies to promote more jobs and activity to get the deficit down."

Influential Tory backbencher Robert Halfon, who led calls for cuts in taxes like fuel duty, cautioned against new levies which would hit ordinary workers in the pocket.

Mr Halfon told BBC Radio 4's Westminster Hour: “Clearly there’s going to be some very hard choices that have to be made, both in terms of public spending and in taxes.

"I just hope that whatever they do, they don’t put taxes up which hit ordinary folk in terms of the cost of living or hurt small and medium businesses.

"I have no problem with taxes going up for big business or multi-billion pound tech companies or whatever it may be, but we have to be very clear that we’re not going to be the party that is raising fuel duty or messing around with the triple lock pension, because these do have a big impact on the cost of living.”

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