Yahoo Finance Rishi Sunak told he must raise £44bn through VAT, income tax or National Insurance if he spares spending cuts
Rishi Sunak is facing having to raise billions of pounds by hiking either national insurance, income tax or VAT if he does not cut spending in this Autumn's Budget, according to the head of UK's leading tax thinktank.
Paul Johnson, the director of the Institute for Fiscal Studies, said that the Chancellor of the Exchequer would have to raise around two per cent of national income - just over £44billion - from taxes if spending was not reduced.
MPs were told by some of the UK's leading economists that Mr Sunak will need to raise more taxes to pay off the unprecedented levels of public debt taken on during the coronavirus crisis.
There was broad agreement that it remains unnecessary to pay down the Government debt, which topped £2 trillion last month for the first time since the 1960s, immediately.
But challenged about the Government's fiscal response to paying for the coronavirus pandemic, Mr Johnson admitted it is "probably true" that taxes will have to rise due to the effect of the crisis on the economy.
Mr Johnson told MPs on the House of Commons' Treasury select committee that if Mr Sunak chooses to raise taxes "the likelihood is that it is going to have to be a fairly substantial increase - that might be 2 per cent of national income, for example.
"And you would have to look at the substantial taxes and we know that getting on for two thirds of tax revenues come from National Insurance, income tax and VAT.
"So I would expect in the medium run increases in those taxes, simply because that is where significant amounts of income come from."
Council tax could rise because "relative to lower value properties, high value properties are relatively undertaxed", he said.
Another idea was to extend the number of products which have VAT applied to them which would be preferable, alongside a broadening of the tax base, but "recognising that this is politically unpopular".
A two or three percent increase of the basic rate of tax of 20 per cent "is not going to do any significant economic damage", he said, although he preferred changes to VAT.
On pensions were also "some arguments" to remove tax advantages for higher earners while Mr Johnson also suggested that pensioners should be taxed more on pensioners' income pointing out that there had been "no increase on pensions in payment".
He said: "There is a case at least for a modest increase in tax on occupational pensions in payment given that they will not have National Insurance paid at any point in the past and have been extremely well 'tax relieved'.
"That generation has generally done very well out of those occupational schemes. But again that would not be something that would raise you very large amounts of money."
However Mr Johnson urged Mr Sunak not to hike taxes for at least two or three years because "we still don't know what is going to happen next in terms of Covid".
He said: “So I certainly don’t think we should be looking at tax rises this year, and I would be surprised if we see significant tax rises next year.
“If we do need higher taxes we are probably looking at bringing them in two to three years hence rather than in the next six months to 18 months, once, we hope, the economy is firing on all cylinders, or close to it.”
Philip Booth, a senior fellow from the right of centre Institute for Economic Affairs, said that if Mr Sunak wanted to raise taxes and limiting damage to economic growth he should look at levying VAT on more goods and services such as food, domestic fuel and transport.
Mike Brewer, chief economist at the Resolution Foundation, said that while he was not expecting tax increases in the next 12 months, "wealth taxes on immovable sources of wealth" would be sustainable for decades.
He said: "With the increasing digitalisation, globalisation, mobility of income and difficulty in pinning down income, something like a wealth tax particularly on immovable sources of wealth might be something that is sustainable throughout the next few decades."
Mr Brewer stressed that over the next few decades "something has got to give somewhere" to fund existing public services and pensions.
He said: "We either need substantial tax rises or we need to provide less good healthcare, social care and pensions - or the population have to pay more themselves."
Asked if he backed taxing people's land more he added: "Land is a perfect thing to tax - we just need to find a way of valuing it all. It is a long favoured tax by economists."
Number 10 pushed back against claims at the weekend of Treasury plans for a raid on capital gains, pensions, internet sales, fuel and inheritance.
The Prime Minister's official spokesman said: "There has been a lot of speculation on tax issues over the weekend. It is just that: speculation.
"Tax policy is set at the budget. Our policy is to drive growth and productivity and put the public finances on a sustainable footing."
What are Rishi Sunak's options?
Income Tax - 1pc increase in all bands raises £7 billion a year; a 1pc increase on just the 40pc higher rate raises £1.3billion a year;
National Insurance Contributions - 1pc increase in main rate for employed and self-employed raises £4.9billion a year
VAT - 1pc increase on main VAT rate raises £7billion a year
Corporation tax - 1pc increase raises £3.1billion a year
Fuel duty: 10p increase raises £500million a year
Council tax: 10pc on all rates of council tax raises £3.3billion a year
Source: IFS
