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Raising taxes or imposing a public sector wage freeze are among the options on the table to pay for a government loan boom during the coronavirus pandemic, according to a leaked Treasury document.
The internal report estimated that Britain’s budget deficit, the gap between government revenue and spending, is on track to hit £ 337 billion this year after a dramatic increase in public spending to cushion the economic consequences of the disease. , while tax revenues have been affected by blocking measures.
In the document outlining potential costs for the public portfolio, revealed by the Daily Telegraph, Treasury advisers outlined a package of possible policy measures for Chancellor Rishi Sunak to consider.
Internal predictions for a deficit this year of £ 337 billion are more or less in line with estimates made by the independent Treasury forecaster, the Office of Budgetary Responsibility, which had borrowed from loans of £ 273 billion this year. The deficit was expected to be approximately £ 55 billion this year, before the pandemic occurred.
Sunak previously warned that the impact on the public portfolio is expected to be significant. So far, the government has declined to elaborate on the costs of its support schemes or how it intends to pay for them. However, ministers are focusing on responding to the crisis first before establishing a budget plan later in the year.
Among the options that Sunak could consider are:
Austerity
The most controversial option would be to relaunch an austerity campaign by cutting public spending. According to the Telegraph, the Treasury report suggests that a two-year public sector wage freeze could generate savings of £ 6.5 billion by 2023-24.
The architect of conservative austerity policies used after the financial crisis, former Chancellor George Osborne, has advocated a new era of belt tightening after the Covid-19 outbreak.
However, this approach is considered politically toxic given the damage to public services under Osborne. With members of the public gathered every Thursday night to applaud the NHS, care workers and other public sector personnel at the center of the pandemic, it would take a fearless Chancellor Tory to defend the real pay cuts and reduce levels of financing.
After Boris Johnson set a course in the December elections to gradually reverse cuts, government spending as a proportion of national output shot up to the highest levels since the 1970s before Covid-19 hit. But after years of cuts, many areas remain unfunded.
Tax increases
Expert groups have suggested tax increases, particularly among conservatives, as the solution to address the budget deficit, including economists at the Institute for Fiscal Studies and the National Institute for Economic and Social Research.
The Treasury document suggests a broad approach that would include breaking the Tory’s “triple tax lock” promise not to raise the income tax, national insurance or VAT, which was done before the election.
According to the report, raising significant amounts would require “broad-based” changes, meaning that they would apply to all levels of income, including income tax, VAT, corporation tax, and national insurance. He said a 1% increase in the basic income tax rate to 21% would raise about £ 5 billion per year.
The triple pension lockout, which ensures annual increases in the state pension online at whichever is higher than average earnings, inflation or 2.5%, could also be removed, saving £ 8 billion per year. Potentially helping to share the cost of the crisis between the old and the young, the idea has been put forward by the Social Market Foundation.
Sunak has dropped a strong hint that self-employment taxes could rise as the country comes out of crisis mode. Speaking of the lower tax rates that are open to self-employed workers, in light of the support scheme made available to those who work for them, he said in March: “It is much more difficult to justify inconsistent contributions from people with different states of employment. If we all want to benefit equally from state support, we must all pay equally. “
Increase
The chancellor has suggested that he would prefer to grow the economy as the main means of reducing the deficit. The budget deficit is influenced by two factors: public spending and tax revenue. Today, tax revenues have plummeted because the economy has generally stagnated. Restarting activity and encouraging faster growth could help raise more taxes, reducing the deficit.
The challenge with this approach will be how quickly business can resume without spreading the virus. The growth rate could also be constrained by the deep damage of business failures and job losses, although the scale of government support packages is designed to cushion this blow.
Speaking at a briefing on Downing Street last month, Sunak said a return to austerity would not be appropriate, and that the government’s “leveling” agenda would take priority. “In fact, I think this may still be a critical part of how we get back to normal here,” he said.
He added: “Obviously, this has cost a lot … but the best way to get out of this for all of us is to grow the economy.”
Loan
Britain is not alone on its way to a monumental increase in public lending as the pandemic spreads. The United States Treasury has reported a record deficit of $ 738 billion (£ 599.2 billion) for the month of April, while other countries are also rapidly increasing their outstanding debts.
The Treasury report warned that the UK could face a sovereign debt crisis, where government borrowing costs become ruinously expensive, unless the economy recovers quickly, echoing warnings that Osborne made during the crisis. 2008 financial statement.
But as one of the world’s largest economies and other countries are also struggling, economists believe the UK has little trouble attracting domestic and international buyers of government bonds, sold to accommodate increases in loans. The Bank of England is also buying large amounts of public debt through its quantitative easing program.
Interest rates on government loans are at record lows, making it cheaper to finance public spending. The value of the nation’s debts could also decrease over time as inflation increases.
