Rishi Sunak’s government said it’s inevitable that all Britons, especially the richest, will have to pay more tax to restore stability to the public finances.
Sunak met with Chancellor of the Exchequer Jeremy Hunt on Monday to discuss tax and spending plans ahead of an economic statement planned for Nov. 17. They discussed the “eye-watering” gap in Britain’s public finances, and agreed “tough decisions” are needed on tax rises and on spending, according to a Treasury readout.
“They agreed on the principle that those with the broadest shoulders should be asked to bear the greatest burden,” the Treasury said. “However, given the enormity of the challenge, it is inevitable that everybody would need to contribute more in tax in the years ahead.”
The measures are necessary to bring calm to financial markets that dumped UK government bonds and the pound after Liz Truss’s tumultuous 44 days as prime minister.
Two leading research groups on Tuesday said Sunak and Hunt can’t rely on spending cuts when they present autumn statement. The government is having to bear down on the deficit while the economy teeters on the brink of recession and inflation lingers at a 40-year high.
Resolution Foundation said Sunak needs to find £40 billion ($46 billion) of savings to “re-establish economic credibility.” It says spending cuts of that scale aren’t plausible because high inflation already is squeezing the budgets of government departments.
“This reality means that the Autumn Statement is likely to involve tax rises, not just spending cuts,” James Smith, research director at Resolution said.
Investors took fright after Truss’s program indicated Treasury borrowing would spiral and have since returned calm to markets after many of the policies were reversed.
Proposing a major economic shift in a separate paper, the Institute for Public Policy Research called for £40 billion of tax increases aimed largely at the rich, saying that would help reduce inflationary pressures.
Targeted levies, such as reversing Truss’s £15 billion cut to national insurance contributions and higher capital gain tax, would slow consumer price growth and prevent the Bank of England having to make big rate hikes. That would protect growth and spare the country a recessionary squeeze, IPPR argued.
A market backlash against the Truss government for £45 billion of deficit-funded tax cuts has left Sunak and Hunt with little option but to stabilize the public finances before they contemplate programs that would cushion consumers and business from the downturn.
They are also contending with higher government borrowing costs and weak growth. Resolution expects the Office for Budget Responsibility, the independent watchdog, to forecast a recession next year and for half a million people to lose their jobs.
Resolution said weaker growth will raise borrowing by around £20 billion a year by 2026-27. Higher global rates have added £10 billion to government borrowing costs and a lingering penalty rate markets are imposing on the UK for the loss of credibility under Truss has added another £10 billion, the think tank added.
To get debt falling by 2026/27 and leave headroom for unforeseen shocks, Hunt will have to find roughly £40 billion of savings.
He could cut public investment, but that would be “anti-growth,” Resolution said. Squeezing public services further would not be credible and scrapping inflation-indexed pension and welfare increases would hurt the living standards of low-income families.
Alternatively, the government should “go full circle on mini-budget U-Turns by reinstating Sunak’s Health & Social Care Levy,” Resolution said, adding that would rase about £15 billion by 2026-27. Hunt has already scrapped almost all the Truss tax cuts.
IPPR called for a fundamental economic reform that would deliver the government £42 billion of fiscal headroom, removing the need for any cuts altogether.
The think tank said the lesson from the market backlash against Truss’s policies was that they must not add to inflation, which is already at 40-year highs.
Raising £40 billion of taxes on wealthy households who were the “financial winners” in the pandemic would bear down on prices. The Bank of England could then “raise interest rates more slowly than markets expect, to about 3% to 4%.”
IPPR said its measures would support growth, which would bring debt under control without painful austerity or further tax rises.