EYE-WATERING tax rises may be needed to cover the massive cost of the Covid pandemic, a leading economic thinktank has warned.
The Institute for Fiscal Studies (IFS) said a theoretical income tax rise of 6p or 7p for every £1 earned would be required to cover the predicted £50 billion to £60 billion of extra public spending over the next five or six years.
IFS director Paul Johnson said: “It is entirely inappropriate for the Chancellor to consider raising taxes this year or next, or possibly even the year after.
“Longer term, clearly, if we have a bigger state we will need more tax and, if we think the state is going to be 2% to 3% bigger than we’re spending, then that’s probably the magnitude you would have to raise taxes, and that’s a lot.”
The IFS also said Rishi Sunak should abandon any plans for a multi-year spending review due to the unprecedented uncertainties facing the economy, and instead set a one-year plan and focus on how much of the £70bn spent on the pandemic this year will also be a feature of future UK budgets.
The calls came as the IFS looked at how much has already been spent on Covid and what options are open to the Government.
It found spending had increased 20% above the Government’s original plans before the pandemic.
Most extra spending has been on the Department of Health and Social Care, with £15bn spent on PPE and £12bn on rolling out the Test and Trace programme.
Scotland has received an extra £6.5bn from the Treasury.
To offset this, the IFS said budgets could be cut on building new railways, roads and infrastructure, although this would fly in the face of the Tory manifesto pledged of “levelling up” the north of England.
Economists found the Government’s initial plans for spending next year would have seen public service spending rising by 10.7% in the next three years, enough to reverse two-thirds of the cuts to per-person public service spending over the past decade.
Research economist and report author Ben Zaranko said those numbers were now redundant.
He said: “The immense economic uncertainty associated with the Covid-19 pandemic, and the looming end of the Brexit transition period, make this an extraordinarily difficult time for the Chancellor to be formulating public spending plans.
“Covid-19 has blown previous spending plans out of the water, with more than £70 billion allocated to departments this year for day-to-day spending as part of the response to the virus.
“If some of these spending programmes, such as the running costs of NHS Test and Trace, are to be unfortunate facts of life for years to come, they could swallow up huge amounts of money, and leave some public services facing another round of budget cuts.
“Avoiding that scenario would require the Chancellor to find billions of extra funding, paid for at some point through higher taxes.”
The IFS predicts public spending could rise from 39.8% of GDPat present to 41% by 2025, adding around £60 billion to the public spending bill, it said.
That would equate to around 6p or 7p on every pound earned in extra income tax although it could depend on whether it is added to the higher tax band or elsewhere.
Economists have also argued that any tax rises should be through either income tax, national insurance or VAT changes, as they produced the biggest results.
The Treasury spokesperson said: “The Spending Review will proceed this Autumn, as planned. The Chancellor has already confirmed that departmental spending will increase above inflation - both for day-to-day spending and longer-term investment.”
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