Rishi Sunak told hiking taxes in Budget will hit UK economy hard

Rishi Sunak was today warned that hiking taxes too early risks wrecking the fledgling economic recovery as a think-tank said the UK faces the biggest hit in the G7  

The respected NIESR urged the Chancellor to be cautious in his Budget next month, despite hints that he intends to start repairing the battered public finances. 

It has downgraded forecasts for growth this year from 5.9 per cent to just 3.4 per cent, with the renewed lockdowns and fears over variant strains crushing hopes of a ‘V-shaped’ rebound.

And the NIESR said even those figures were based on Mr Sunak holding off tax rises until there were ‘clear’ signs of strength, suggesting any increases must be ‘gradual’ and focused on income tax rather than businesses.  

The respected NIESR urged Rishi Sunak (pictured) to be cautious in his Budget next month, despite hints that he intends to start repairing the battered public finances

The forecasted annual drop of nearly 9 per cent at the end of the first quarter would be more than twice the expected decline in Japan, which is the second-worst hit country in the G7

The forecasted annual drop of nearly 9 per cent at the end of the first quarter would be more than twice the expected decline in Japan, which is the second-worst hit country in the G7

The NIESR pointed out that the future for the UK economy was highly uncertain

The NIESR pointed out that the future for the UK economy was highly uncertain

The NIESR said a 'prudent approach to fiscal consolidation would favour tax rises to spending cuts' because of their 'relatively smaller impact on GDP'

The NIESR said a ‘prudent approach to fiscal consolidation would favour tax rises to spending cuts’ because of their ‘relatively smaller impact on GDP’

The think-tank’s outloook said that the economy struggle more than previousl expected due to lockdowns.

The forecasted annual drop of nearly 9 per cent at the end of the first quarter would be more than twice the expected decline in Japan, which is the second-worst hit country in the G7.

‘Early indications are that the lockdown in the first quarter is having a larger impact on activity than in November, but a smaller impact than the spring 2020 lockdown,’ it said.

The economic shock means that as many as 2.5million people in the country could be unemployed before the end of the year, unless the Government acts to extend the furlough scheme to support jobs.

More than £46billion has been paid out in furlough cash since the scheme launched in May, supporting around 10million jobs.

However, the scheme is due to come to a close at the end of March this year.

NIESR said that in its ‘main-case forecast scenario, unemployment is expected to rise significantly following the end of these schemes in April, reaching 7.5 per cent or 2.5 million people by the end of the year’.

It added: ‘To prevent a rise in unemployment of the magnitude of the forecast, and to limit the economic and social ‘scarring’ from the public health crisis, the Chancellor should soon announce policies to support the labour market beyond April.

‘The pace and path of the recovery will depend on state-contingent and targeted policy interventions.’

The NIESR also published an assessment of how Mr Sunak should start to balance the books – stressing that he should wait until the crisis subsides before beginning the painful process.  

‘The results of our simulations suggest that a prudent approach to fiscal consolidation would favour tax rises to spending cuts because of their relatively smaller impact on GDP initially,’ the report said. 

‘Among the possible tax rises, income tax should be preferred because of its lower multiplier. 

‘The emphasis on tax rises is also justified by the need for increased spending on welfare, health, infrastructure and education due to the large negative shock from the pandemic. 

‘Cutting public investment and spending on social care and education would have more adverse effects on the economy’s longer-term potential output through their impact on productivity.’ 

In its latest Monetary Policy Committee report, the Bank reduced its estimate for economic growth from 7.25 per cent to 5 per cent for this year

In its latest Monetary Policy Committee report, the Bank reduced its estimate for economic growth from 7.25 per cent to 5 per cent for this year

The MPC suggested that the impact from the latest draconian lockdown does not seem as bad as from the first one last spring

The MPC suggested that the impact from the latest draconian lockdown does not seem as bad as from the first one last spring

The think-tank stressed: ‘The consolidation should only start when the economy is on a clear recovery path, and even so should be done gradually in order not to harm the recovery.’ 

Last week the Bank of England slashed its growth forecast for this year but voiced hope that the rapid vaccine rollout will spark a strong recovery after June.

In its latest Monetary Policy Committee report, the Bank reduced its estimate for economic growth for 2021 from 7.25 per cent to 5 per cent.

It said an expected 4 per cent dip in this quarter will leave the economy an eye-watering 12 per cent smaller than at the end of 2019. 

However, that would avoid a double-dip recession – which would have required two successive quarters of contraction – and the MPC suggested that the impact from the latest draconian lockdown is not as bad as last spring.

Governor Andrew Bailey pointed to the prospect of a surge in consumer spending from people splashing out with money saved on travel during the squeeze, amid evidence of strong holiday bookings for later in the year.  

And the Bank increased its forecasts for next year from 6.25 per cent to 7.25 per cent – while stressing that the mutant strains circulating meant the situation is highly uncertain.