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Summary
- A study by the Institute for Fiscal Studies has warned that if taxes are not hiked by £60 billion, the economy could be in debt hole mostly due to the Covid-19.
- The pandemic has taken the fiscal deficit for this year to £394 billion, which is 19 per cent of the GDP -- highest since 1944-45.
A recent study by the Institute for Fiscal Studies (IFS) has warned the government that if the furlough support scheme is not targeted properly, and the books of account are not rightly balanced, the financial implications could be grave. It has highlighted that the government may be forced to hike taxes by £60bn ($83.4bn) a year to fill in the void created by the Covid-19.
Apart from world wars, government borrowing in Britain has never reached the levels it is expected to reach 2020-21. Several studies estimate that England would have to borrow between £50 billion and £190 billion even in 2024 to make up for the gap in everyday finances.
These studies assume importance in the backdrop of the government’s budget that would be presented on 3 March. All eyes are set on Chancellor of the Exchequer Rishi Sunak who is all set to present the first budget after the pandemic.
Paul Johnson, director of the IFS, said that England’s deficits are set to become unsustainable, and it is likely that the gap would have to be bridged by an increase in taxes in future.
Also read: Why are the UK finance tax receipts projected to drop this year?
The Office for Budget Responsibility (OBR) had said in its November outlook that the pandemic had taken the fiscal deficit for this year to £394 billion, which is 19 per cent of the GDP -- highest since 1944-45. It also said that government debt was at 105 per cent of GDP, the highest after 1959-60.
The IFS study paints a much grimmer picture of the economic crisis than what the OBR had said. In December, the government borrowed £34.1 billion, up by £28.2 billion for the same period a year ago.
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The IFS has urged Sunak to extend the £20-a-week top-up which would cost £6.5 billion. It was introduced last year and is set to expire in March. It also asked the government to do away with stamp duty on property dealings and to replace it with a reformed tax system. IFS said that long-term support might be important for the survival of the aviation sector and the furlough scheme should extend till as long as restrictions are in place, but any support beyond that could be detrimental for recovery.
Also read: Sunak’s spending review 2020 at a glance
Workers who previously earned more than £50,000 a year or those who have been outside the crisis income support schemes should be included, the IFS has recommended.
The UK government would now have to deal with three major issues simultaneously – the economic fallout of Covid-19, the Brexit, and commitment towards the green initiatives. In order to tackle the Covid-19 costs, Sunak would need a balanced budget. Though it is important to provide support to jobs lost during the pandemic and businesses that have been hit, it is also imperative to wean off the blanket government aid.
