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Ministers will have to dramatically increase taxes in the coming months to deal with an estimated deficit of £ 337 billion in the current financial year in the wake of the coronavirus pandemic, according to a leaked Treasury document.
The document sets out a proposed “policy package” of tax increases and spending cuts that may have to be announced soon to “improve credibility and increase investor confidence.”
The document, revealed in the Daily Telegraph, warns that the country could face a “sovereign debt crisis” unless the economy recovers quickly.
The central treasury deficit prediction is in line with a forecast last month from the Office of Budgetary Responsibility, the official taxation agency, which suggested a deficit of £ 273 billion for the current year.
The OBR also predicted a 35 percent drop in GDP in the second quarter of this year due to falling economic activity as a result of the Covid-19 blockade.
A figure of £ 337 billion would equate to around 17 percent of GDP.
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Authorities tried to downplay the importance of the document on Tuesday night, saying it was “speculation” to claim that the policy suggestions would be enacted. One said that there were many similar Treasury documents from officials exposing ideas about future policies.
But what’s most politically revealing is the shopping list of possible tax increases, including a rise in income tax, the end of the triple block on state pension increases, and a two-year public sector wage freeze.
The May 5 document, marked “Official – Market Sensitive” indicated that a budget deficit of £ 337 billion was now the “base case” for this financial year, against a forecast of £ 55 billion in the Budget of March. That figure would more than double the £ 150bn annual deficit shortly after the financial collapse a decade ago, leading to a decade of “austerity” spending cuts. The document suggests that tax increases or spending cuts equivalent to £ 25bn-£ 30bn would be needed in that scenario.
He acknowledges that Foreign Minister Rishi Sunak has indicated an acceptance of a higher level of debt, but adds: “As debt is likely to reach significantly higher levels after the crisis, it will be important to stabilize the debt-to-GDP ratio and prevent debt from keep growing on an unsustainable path. “
That means tax increases would be unavoidable, breaking the Tory manifesto’s commitment not to raise taxes or eliminate the triple blockage of state pensions.
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The chancellor is also told he could find more cash through spending cuts, such as a two-year freeze on public sector pay, saving £ 6.5 billion by 2023-24.
Even then, the document suggests that the final deficit could be even higher, up to £ 516 billion, increasing to £ 1.19bn in five years, if there is an “L-shaped economic decline”. The best V-shaped scenario would still lead to a deficit of £ 209 billion, according to the newspaper.
The leak came just hours after Chancellor Rishi Sunak announced an extension of the “unlicensed” wage support plan in late October, which would imply higher costs for the treasury.
“Government debt means very little to people concerned about their jobs and where they get next month’s paycheck,” said a government figure. “Our focus is the here and now.”
