No tax hikes until economy improves, chancellor urged

Think-tank calls for more government support before any increase to levies.

The chancellor is being urged to focus his impending Budget on extending government emergency support rather than tax rises.

Rishi Sunak is due to deliver the 2021 Budget on 3 March. Many commentators expect him to outline plans for tax rises to combat the UK deficit and repay state support during the pandemic.

But think-tank the Institute Fiscal Studies (IFS) has warned that while tax increases will eventually be needed, now is not the right time.

Instead, the IFS says the Budget needs to announce well-targeted extensions in emergency support and set out a plan for phasing them out.

It suggests that furlough should not completely stop, as it is due to on 30 April, but should be phased out as lockdown restrictions ease.

If furlough is extended, then so should the self-employed income support scheme, the IFS says.

The economy cannot adjust and recover until most of this support has been removed, the IFS warns.

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The IFS adds that the economy also needs to adjust to the triple challenges of Brexit, recovery from Covid-19 and the move towards being carbon neutral.

Paul Johnson, director of the IFS, says: “This will be Rishi Sunak’s second Budget, but his 15th major fiscal announcement.

“In it, he needs to strike a balance between continuing support for jobs and businesses harmed by lockdowns, and weaning the economy off blanket support which will impede necessary economic adjustment.”

It is unclear which taxes Sunak could target in the Budget, but he has previously called for a review of capital gains tax and inheritance tax.

Terry Burgum, financial planner at wealth and tax adviser Kreston Reeves, suggests an online sales tax and clampdown on pension tax relief could be used to raise funds and repay some of the £280 billion government borrowing from the past year.

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Burgum says: “There has long been speculation that further cuts could be made to increase tax revenues, or tax relief could be set at a single rate of 30% to help balance this benefit more evenly across basic rate and higher-rate taxpayers.

“Another target could be the 25% tax-free cash entitlement when drawing pension benefits. However, this would hurt everyone who has a pension and be politically unpopular with large sections of the voting public rather than the far smaller group of higher earners previously targeted.”