National debt has topped £2trillion and borrowing looks set to hit the £350bn this year and the Chancellor has been forced to admit the Tory manifesto pledge not to increase income tax, national insurance or VAT will be difficult to honour. Mr Sunak told last week’s virtual Conservative Party conference the Government had a “sacred responsibility” to future generations to rebuild the public finances.
But experts fear tax increases could inflame the economic crisis rather than ease it and have called for Mr Sunak to introduce policies that support workers and business investment to re-establish a strong tax base.
Tom Clougherty, Head of Tax at the Centre for Policy Studies thinktank, said: “The COVID-19 pandemic, and the necessary economic response to it, have wrought havoc on the government’s budget deficit.
“But trying to close the fiscal gap now, in the midst of enormous economic uncertainty, and with a post-Brexit trade deal hanging in the balance, would be an act of self-sabotage.”
He continued: “When the time does come to bring down the deficit, the last way the Government should do it is by raising taxes on productive investment.
“Whatever short-term revenue boost such measures yielded would likely be outweighed in the medium term by a drag on economic growth.
“Britain cannot afford to take its tax competitiveness for granted.”
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Daniel Bunn, Vice President of Global Projects at the Tax Foundation, said: “The challenge that the pandemic has created for public finances should be met with sound policies for the longer term.
“Now is not the time for tax hikes, however.
“The UK should focus on policies that support workers and business investment. A stronger tax base can come with growth, but increasing rates now will work against an economic recovery.
“Reforms that improve competitiveness can set a better trajectory for the UK.”
Former Brexit Secretary David Davis also warned the Chancellor to avoid tax hikes as a means of solving the cash crisis sparked by coronavirus.
He said: “Even in normal circumstances you have to be wary of increasing taxes in such a way as to reduce economic activity.
“When the country and the economy is as fragile as it is right now it would be an unforgivable error to stall growth with extra taxes.
“They would have the opposite effect intended.”
IFS director Paul Johnson said: “For now, with borrowing costs extremely low, Mr Sunak shouldn’t worry unduly about the debt being accrued as a result. It is necessary.
“Unfortunately, none of this will be enough fully to protect the economy into the medium run.
“Without action, debt – already at its highest level in more than half a century – would carry on rising.
“Tax rises, and big ones, look all but inevitable, though likely not until the middle years of this decade.”
