WATCH: Economic damage from pandemic likely to be lasting – Rishi Sunak
UK chancellor Rishi Sunak has fuelled speculation of tax hikes in years to come as he warned Britain’s soaring spending and borrowing levels were “unsustainable.”
Sunak said UK government borrowing would total £394bn ($525bn) this year at around 19% of GDP, the highest level in peacetime history. The economy will be about 3% smaller than expected in the March budget, he added.
He said it was the government’s “responsibility” to return the public finances to a “sustainable” fiscal position as the economy recovered.
The chancellor has made such comments repeatedly, and again stopped short of outlining this week how he would seek to plug the gap. He has declined to rule out tax rises when pressed before.
He and UK prime minister have vowed no return to austerity, sparking growing expectations taxes will have to carry the weight later down the line. But Sunak emphasised measures were needed in the “long term,” and has often highlighted the more pressing need to safeguard firms and jobs and thus the UK tax base.
The soaring costs of UK government spending and hit to tax receipts from the pandemic have sent borrowing to the highest levels in decades.
Sunak acknowledged the widely expected “scarring” effect of the coronavirus crisis is likely to leave the economy permanently smaller than its forecast path before the virus hit. He said it would not return to pre-crisis output levels until the final three months of 2022, and that even in 2025 the economy would be 3% smaller than expected in March.
Low interest rates and the Bank of England’s government bond-buying programme have kept government borrowing costs low, but Sunak faces pressure from some backbench MPs to show how he will eventually plug the likely persistent budget gap.
WATCH: Why tax rises may be inevitable in Britain
An official report commissioned by the chancellor earlier this month proposed increasing capital gains tax.
Scrapping exemptions and doubling rates to match income tax rates could raise £14bn, according to the Office for Tax Simplification and HMRC analysis, but they noted behaviour would likely change and leave actual revenue lower.
The tax is levied on the profits from selling property or shares, with a tax-free allowance of £12,300.
Meanwhile the Resolution Foundation think tank called earlier this month for a 3 percentage point hike in corporation tax to 22%, raising a potential £10bn, and a “pandemic profits levy” of 10% on profits of firms whose profits have been boosted by the pandemic.
Not all Conservative MPs are concerned about borrowing levels in the short term. Conservative MP Jake Berry, leader of the Northern Research Group of Conservative MPs, warned on Wednesday against tax hikes during the current parliament, which runs to 2024.
In an interview with Sky News before the spending review, he said low borrowing costs meant the chancellor could afford to delay tax rises. “Nobody wants to snuff out this recovery,” he said.
Watch: Leader of the group of northern Tory MPs plea for tax rise delay