Photo: Chris McAndrews / Creative Commons
Next month’s Budget should lay the groundwork for economic recovery rather than seeking to repair the public finances by raising taxes. Chancellor Rishi Sunak should focus on measures to help the economy adjust to Brexit, recover from Covid, and move towards net zero, said the Institute for Fiscal Studies. At the same time the chancellor should continue to provide well-targeted extensions to emergency support measures, the economic thinktank said.
In the recovery phase there was a need to support jobs and investment. Echoing recent remarks by CBI director-general Tony Danker, IFS director Paul Johnson said the UK faced huge uncertainties “as the economy adjusts to the triple challenges of Brexit, recovery from Covid and the move to net zero”.
Based on analysis conducted with Citi Resarch, the IFS said that the public finances are not on a sustainable path, but substantial tax rises should not be part of the Budget, due on 3 March. Johnson said Sunak “needs to strike a balance between continuing support for jobs and businesses harmed by lockdowns, and weaning the economy off blanket support.”
The strength of the recovery would hinge on the extent to which the lockdown can be eased and how consumer spending responds. The central projection from Citi Research was that the Covid vaccine would underpin “a rapid but ultimately incomplete recovery”, leaving the economy still 3% below its pre-Covid level at the end of this year.
Support measures introduced in response to the pandemic and due to expire shortly should be extended in some form and phased out gradually rather than coming to an abrupt halt. Any significant continuation of the furlough scheme should be “limited and carefully targeted” and it should be phased out “as soon as conditions allow”, the IFS said.
As the lockdown is eased the government should turn its attention to measures to support the economic recovery and help ease the transition to a new normality. These should include investment in physical and digital infrastructure, training and science to boost the productive capacity of the economy and to achieve goals such as reaching net zero by 2050. Private sector investment should be encouraged by removing regulatory uncertainty and disincentives to investment in the tax system. Measures to prevent long-term unemployment such as extending the Kickstart scheme beyond December 2021 would also be needed.
Though “sizeable” net tax rises were likely to be needed at some point, uncertainty about the future performance of the economy was one reason why they should not be introduced “any time soon”.