Taxpayers face a day of reckoning when the government’s massive coronvavirus support measures have to be paid off, experts warn.
The Institute of Fiscal Studies think tank said the economy will remain in a “support and recovery” phase for some time, but higher taxes are inevitable.
It was revealed on Wednesday that the cost of the chancellor’s economic support measures had risen to £190bn.
The IFS predicts government borrowing will surge to about £350bn this year.
Chancellor Rishi Sunak’s summer statement included another £30bn of measures to support the economy through its emergence from lockdown.
It means the cost of the crisis has risen by more than 40% since last month, when the government’s spending watchdog, the Office for Budget Responsibility, estimated it at £133bn.
On Thursday, in its analysis of the latest measures, the IFS said it expects further spending support in the Autumn Budget, perhaps through targeted tax cuts.
However, IFS director Paul Johnson said: “Let’s hold in the back of our minds that a reckoning, in the form of higher taxes, will come eventually.
“This is no normal recession. It’s the deepest in history.”
The IFS said annual borrowing as a share of the economy was on course to be its highest outside wartime in more than 300 years.
In March, the government forecast a deficit of about £50bn to £60bn this year. The IFS said it could now hit about £350bn, although the think tank added that given the economic fragilities there was huge uncertainty around that figure.
Wednesday’s additional spending announced by Mr Sunak is worth nearly £3,000 for every person in the UK – and more than the entire planned health budget for 2020-21.
There are some things no chancellor can prepare for – such as what to do if your economy wipes out 18 years’ gains in two months of lockdown.
His solution was to temporarily deep freeze the economy, and pump money into crisis response. And the thawing process needs more funds, to prevent long term damage.
Now economists are talking about a deficit, a shortfall of way more than the £300bn previously expected. It’s equivalent to a bigger slice of the economy than at any time since the Second World War.
And it could get bigger; if more is needed to support the recovery – or in the event of a severe second wave.
But it’s a cost worth bearing if it carries the economy through a devastating crisis, safeguard the damage to output and jobs – and ensure taxes get paid.
For at some point, there will have to be a discussion about how we pay this back.
The government is currently borrowing record amounts on the financial markets to plug the gap – but that may not be enough. There may have to be tax hikes, possibly less generous rises in pensions.
But it may be a while until the economy is robust enough to bear that.
Of the policy measures announced in Wednesday’s summer statement, the biggest was the plan to pay employers £1,000 for every furloughed worker they retain past January. The total bill could rise as high as £9.4bn, but only if every furloughed worker keeps their job.
But Mr Johnson said there was a “value for money issue” about the scheme.
“A lot, probably a majority, of the job retention bonus money will go in respect of jobs that would have been, indeed already have been, returned from furlough anyway,” he said. And he said much of the planned cuts in VAT and stamp duty “will be deadweight”.
Businessman Charlie Mullins, founder of Pimlico Plumbers, also questioned if the job retention bonus was money well spent, as he thought some firms would only retain staff until they get the cash.
“Firms will either want their staff back, or they won’t. I just feel some employers will take advantage of this scheme,” he told the BBC.
Meanwhile, Torsten Bell, chief executive of the Resolution Foundation think tank, said the financial cost of the crisis, at £190bn so far, was “approaching the amount we spend on the day-to-day running of our NHS, schools and colleges each year”.
He welcomed the focus on supporting young people and sectors most affected by lockdown, but added: “The scale of support… risks falling short of what will be required. The chancellor is taking quite a gamble on the strength of the recovery in the months ahead.”