Sunak's choice: Raise tax or hurt UK's budget cred, think-tanks warn

By Andy Bruce

LONDON (Reuters) - Britain's new finance minister Rishi Sunak must choose between tax hikes or the loss of fiscal credibility if he wants to raise spending significantly in the country's first post-Brexit budget, top think-tanks and his predecessor have warned.

Prime Minister Boris Johnson wants to spend more on infrastructure to help voters in struggling regions who backed him in December's election, a shift for his Conservative Party, which for 10 years has focused on fixing the public finances.

Johnson has also announced the biggest increase in spending on day-to-day public services in 15 years.

This week, the Institute for Fiscal Studies (IFS) and the Resolution Foundation, both leading think-tanks, said financial reality will constrain Sunak when he sets out the first long-term tax and spending plans of Johnson's government on March 11.

Even before announcements of any extra spending, the current path of borrowing means Britain will soon be at risk of breaking the fiscal rules that were part of Johnson's election manifesto, the IFS said on Wednesday.

Avoiding further cuts in day-to-day spending would be likely to force Sunak to either raise taxes or ditch the rules, something that would "surely undermine" the credibility of Britain's fiscal policy, the IFS said.

"We have already had 16 fiscal targets in a decade ... Mr Sunak should resist the temptation to announce another and instead recognise that more spending must require more tax," IFS director Paul Johnson said.

The Resolution Foundation also said Sunak would have to raise taxes if he wants to increase spending.

The Financial Times said on Wednesday that Sunak would delay some of the government's major spending and borrowing decisions until the second half of 2020, without citing sources.

Sunak's predecessor Sajid Javid, who unexpectedly resigned this month in a cabinet reshuffle, also warned against weakening the rules.

"Unlike the U.S., we don't have the fiscal flexibility that comes with a reserve currency, so that's why the fiscal rules that we are elected on are critical," he told parliament on Wednesday.

Under the most recent fiscal rules proposed by the governing Conservative Party, day-to-day spending would match tax revenue within three years, public sector net investment can rise to as much as 3% of GDP, and spending plans would be reviewed if debt interest payments reach 6% of revenue.

Asked about Javid's plea to retain these rules, Johnson's spokesman on Wednesday said Britain will continue to have a clear fiscal framework, the details of which will be up to Sunak to confirm in his budget speech.

The IFS said loosening or abandoning these rules would put underlying government debt on a rising path that would not be sustainable in the long run.

Last week, official data showed government borrowing in the first 10 months of the financial year stood at 44.8 billion pounds ($58.3 billion), nearly 15% higher than a year earlier.

(Editing by Catherine Evans)