Experts say tax rises next year now look “inevitable” after bleak economic forecasts from the government’s official spending watchdog and a warning from the chancellor that UK finances are “unsustainable.”
The Office for Budget Responsibility (OBR) on Wednesday published updated figures showing the UK is on track to suffer its worst year in three centuries as a result of the COVID-19 pandemic.
The government’s budget deficit for 2020 is expected to be almost £400bn ($534bn) — 19% of GDP — and the state is projected to borrow over £100bn for each of the next five years.
The forecasts were delivered alongside a spending review from chancellor Rishi Sunak. The chancellor said UK finances were “clearly unsustainable over the medium term.”
The government faces a £27bn hole in its budget by 2024 if it continues on its current path, the OBR warned. The shortfall comes due to lower than previously expected economic growth and higher spending. Sunak must decide whether to cut future spending or hike taxes to address the budget black hole.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the OBR’s forecasts were too optimistic and estimated the shortfall would likely be closer to £40bn. He said tax rises now looked “inevitable.”
Watch: Why tax rises now look unavoidable
“With the demographic pressure on spending on health and pensions set to increase over the coming years, and the government committed to spending more in ‘left behind’ communities, big tax rises look inevitable,” Tombs wrote in a note.
“The peak year of tax rises looks set to be 2022, even though sound economic reasons exist for waiting longer, because the next general election is due to be held in May 2024, creating a strong incentive for the chancellor to get any unpopular measures out of the way well in advance.”
Speculation mounted ahead of the spending review that the chancellor could announce tax rises. Sunak ordered a review of capital gains tax earlier this year and the final report recommended raising rates to be in-line with income tax. Reports suggested high-income pension allowances could also be targeted.
“Savers and investors will be breathing a sigh of relief as the much-mooted ‘wealth tax’ failed to materialise in the spending review,” said Myron Jobson, a personal finance campaigner at Interactive Investor.
“However, it is surely a question of when, not if a tax hike will be announced as part of efforts to address the government’s WW2-sized public borrowing bill for its COVID-19 economic support packages.”
Economists said Sunak was right to delay taxes rises for now and instead focus on getting the UK economy back on its feet. But there is broad agreement that tax increases have simply been deferred rather than avoided.
“It’s inevitable increases will happen at some point next year,” said Nimesh Shah, the chief executive of tax advisory firm Blick Rothenberg.
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