Sunak will be forced to raise UK taxes again, economists warn

Rishi Sunak, chancellor, will be forced to impose further tax rises on British households in the years ahead to address his “implausible” public spending plans, economists warned on Thursday.

In the traditional post-Budget briefings, a wide range of economists from the Institute for Fiscal Studies, the Resolution Foundation and the government’s own fiscal watchdog, the Office for Budget Responsibility, questioned whether the public spending totals the chancellor had pencilled in for the years after 2021-22 were adequate.

Conservative MPs cheered Sunak at a private meeting at Westminster on Wednesday night and public criticism of his planned tax rises — including a 6 percentage point rise in corporation tax — has so far been muted.

But a further round of tax rises in the chancellor’s autumn Budget to pay for the long-run impact of Covid-19 on public services could test party unity, especially if the burden again falls on business and higher earners.

We don’t know what the government’s plan is for the post-pandemic consequences of coronavirus, even for the health service, let alone for other departments

Asked on the BBC’s Today programme whether he would stick to his spending plans, Sunak acknowledged that he might have to look again at public spending levels in the autumn.

“We will have to look at future Covid spending in the round when we do the spending review later this year . . . but we are already making progress on backlogs — whether it is in the courts system or the NHS,” Sunak said.

Although the NHS budget is set to fall — from £147bn in 2020-21 to £139bn in 2021-22 — discussions are continuing between health leaders and the Treasury about additional money to cover the costs of treating Covid-19 patients, such as infection control measures, according to people familiar with the situation.

People on the NHS frontline expect more resources to be allocated, particularly for the first half of the financial year which begins in April, when significant numbers of Covid patients will still be being treated. 

Higher spending leading to further tax raising Budgets ahead would add to the 50-year high in the UK’s tax burden, economists said, highlighting how this showed that the Conservative party had “realigned” away from its Thatcherite roots.

The OBR is not allowed to talk about the merits of government policy and has to act impartially. Its chair, Richard Hughes, nevertheless said there were many reasons to think that the chancellor’s spending plans were not credible and would need to be raised.

With a backlog of operations in the NHS, pupils missing out of six months of schooling and the Treasury paying the rail and bus fares, which normally come from commuters, there are many new public spending pressures, Hughes said.

“At the moment, the government doesn’t really have a plan,” he said, adding: “We don’t know what the government’s plan is for the post-pandemic consequences of coronavirus, even for the health service, let alone for other departments that are also facing pressures.”

The government’s medium-term spending plans look implausibly low

In the Budget, Sunak pencilled in another annual £4bn of day-to-day public spending cuts after 2021-22 to help balance the books. These come on top of the £12bn a year savings in last November’s spending review, which was mostly delivered by slashing the UK overseas aid budget and freezing most public sector wages.

Paul Johnson, director of the Institute for Fiscal Studies, cast doubt on the deliverability of the public spending numbers Sunak had pencilled in to improve the outlook for the public finances.

“The government’s medium-term spending plans look implausibly low,” he said, highlighting persistent issues due to the pandemic, such as the likely need for annual vaccinations, better preparedness for future viruses and pressure to improve social care.

If the government stuck to the figures in Sunak’s Budget documentation, prime minister Boris Johnson would fail in his aim of persuading the country he had moved away from austerity, said Torsten Bell, chief executive of the Resolution Foundation.

“It’s not going to feel like the end of austerity if you run a prison, for example,” he said, adding, “whether that is really sustainable, I think, is seriously open to question, not least because there is a lot of post-pandemic spending pressure.”

Rachel Wolf, an author of the 2019 Conservative manifesto and founding partner at Public First, a consultancy, said it was likely that the government would come back with enhanced spending plans later in the year in a “build back better Budget”. She said it was no longer seeking to be the low tax, low spending Tory party of the past.

“This is unquestionably a party and a government that has realigned,” she said, but she hoped that the economic figures would improve, allowing ministers to “under promise and hope you can over deliver”.

“This is an electorate that is more comfortable with tax, particularly business tax, and cares about the fabric of places a lot more,” Wolf added, suggesting that the Budget would be well received by the public.

She said that if the government needed to come back for more tax, it would have to look at green issues and the Budget was “a big miss on carbon taxes”.

Johnson of the IFS agreed with Wolf that fuel taxes were obviously a route to higher revenues if Sunak needed them in future. He said it was an absurdity that for the 11th year in a row, “a government supposedly committed to net zero greenhouse gas emissions has cut the tax on burning petrol and diesel”.