Tax hike warning to help pay for £160bn Covid spending package

A think tank has warned of higher taxes in 2022/23 to help pay for the £160bn chancellor Rishi Sunak has committed to protecting jobs during the Covid-19 crisis.

In a wide ranging response to the economic update on Wednesday, the Institute for Fiscal Studies (IFS) director Paul Johnson said: “Let’s hold in the back of our minds that a reckoning, in the form of higher taxes, will come eventually.”

The think tank poses questions about whether some of the measures announced by the chancellor will deliver value for money.

The Job Retention Bonus will give employers £1000 for every furloughed worker kept on until at least January 2021.

However, the IFS said: “A lot, probably a majority, of the job retention bonus money will go in respect of jobs that would have been, indeed already have been, returned from furlough anyway”.

It also questioned the timing of the VAT cut particularly as it relates to the hospitality sector.

Mr Johnson said: “Maybe it would have been better to wait until we know whether the real problem is on the demand side –people need to be encouraged to go out and eat-or on the supply side-with social distancing restaurants can’t serve enough people.”

The IFS also fired a warning over other measures announced like apprenticeships and energy efficiency programmes saying “you need to be sure you can deliver them. Even at the scale announced this will be challenging”.

The IFS said the chancellor has a difficult balancing act between supporting business now and laying firm foundations for economic recovery.

Mr Johnson concluded: “They need to get the balance between preserving those parts of the economy which have a long-term future and helping to transition to the new normal.

“They also need to actually deliver goods and services and change. That is very different from simply disbursing cash.”

‘Expect pay packets to take a hit in future’

By STV’s Special Correspondent Bernard Ponsonby

When the IFS speaks, politicians sit up and take note. Like the Office for Budget Responsibility its judgements tend to be unimpeachable.

Some of the think tank’s observations make for uncomfortable reading for Rishi Sunak but they readily concede he has a difficult if not impossible task in dealing with an unprecedented set of circumstances.

The problem for Sunak is that he is trying to do a number of different things at once with no guarantee that his spending will actually work.

The interventions are meant to shore up jobs now. Furlough has done that at huge expense. The concern is that the eye watering sums will have given households and businesses breathing space but just postpone the inevitable.

As the IFS point out you can spend £60bn on furloughing or add £8bn to the welfare bill in the form of higher payments to the newly unemployed. The Government have opted for spending more than would have been the case if they had simply let events take their natural course.

The chancellor is also trying to prop up key sectors of the economy like hospitality and tourism whilst laying the foundations for long term sustainable jobs through measures on apprenticeships and targeted help for 16-24 year olds. At this stage it is impossible to gauge how successful these measures will be.

Perhaps the most strikingly candid admission from the chancellor is that he cannot replace all of the jobs that will be lost in the coming months. In that sense the policy is about mitigating disaster not preventing it. Mass unemployment increasingly looks inevitable; the only issue is the weight of the mass.

And the price for trying to mitigate all of this is the biggest deficit since the Second World War. That’s why tax increases are inevitable but as the IFS says not this year and not next whilst the economy is in a fragile state.

Expect pay packets to take a hit therefore in 2022/23.