Britain’s upcoming Budget — when the chancellor announces changes to tax and spending policy — presents a different sort of challenge from normal for the Conservative government. Despite borrowing that is the highest ever outside a world war, it does not present a fiscal problem: with interest rates at record lows and a supportive monetary policy from the Bank of England, the UK faces no financing problems. It would be a mistake to raise taxes or cut spending at this point in the recovery.
The difficulty for the Conservatives instead is that they must decide what they believe the size and shape of Britain’s state should be. Prime Minister Boris Johnson’s rejection of austerity and backbench opposition to tax rises sit uneasily with the determination of chancellor Rishi Sunak to “repair” the public finances. Conservatives will need to start spelling out their vision for the future of Britain, beyond simply being outside the EU. While many Tory MPs remain committed to a small state, the party’s electoral coalition, like that of the Republicans in the US, has become more working class and opposed to further public service cuts.
The puzzle is made even harder by the uncertainty over the economic, and therefore fiscal, outlook. If the damage from the pandemic to businesses and households is temporary, a one-off increase in the government debt burden will be easy to cope with thanks to low interest rates and the long maturity of the UK’s debt stock.
A more permanent loss of national income, however, would merit a very different approach, requiring sustained tax increases to stabilise borrowing. The Institute for Fiscal Studies, an influential think-tank, estimates that in its central scenario Britain would need around an additional £60bn to keep public borrowing stable by the fiscal year ending in 2025. This could double in a pessimistic scenario while an optimistic one would see a stronger recovery mostly pay for extra spending. The pandemic will inevitably increase the demands on the healthcare, education and justice system as hospitals, courts and schools make up for missed operations, lessons and court cases.
Either way it would be premature to try to scale back borrowing now, whether by raising taxes or cutting spending. This would only make the pessimistic scenario more likely by increasing the number of failed businesses and unemployed workers; fiscal stimulus is called for until the recovery sits on firm foundations. The success of the government’s vaccination programme may bring that point closer but it is too soon to claim victory over either coronavirus or the recession it has caused.
Raising taxes later, however, will be made easier if the chancellor starts to prepare the public and his party for the inevitable. That means explaining where the government sees revenue coming from in the future — the party’s election-winning manifesto in 2019 ruled out any increase in income tax, national insurance or value added tax.
The swift backlash among some backbenchers against a recently-mooted rise in fuel duty or a carbon tax suggests the government will struggle to levy green taxes, despite its commitment to hitting net zero carbon emissions by 2050. Previous chancellors, too, have struggled to equalise the tax treatment of the employed and self-employed — a task made more urgent by the proliferation of gig-economy jobs during the pandemic. It is far too early for the Conservatives to begin raising taxes but it is not too early to start thinking and talking about it.