On Friday, Rishi Sunak, the chancellor, raised the possibility of tax increases after official figures revealed that the government had an unprecedented monthly deficit in January.
In 2020-21, the UK is predicted to record a deficit of £350 billion, equal to 17% of national income. This is the highest level of public debt in 70 years.
The UK statistical agency data was much better than expected this year, primarily due to substantial tax revenues.
But Sunak hinted at tax rises to balance the budget. He said, “It’s the right thing to do once our economy begins to recover. I will always be honest with the British people about how we will do this.”
He might do some small steps in the budget for increasing taxes, but the most significant revenue-generating measures are expected to occur later in the parliament.
According to the ONS, the government had a budget deficit of £8.8 billion in January of this year. The first time there has been a deficit during the month for the past ten years, and the highest borrowing level since records began in 1993.
Net government debt rose to 98% of GDP, the highest level since the early 1960s, the ONS noted.
Self-assessment tax payments rose 7% in January compared with a year prior, driven by income earned in 2019-20.
According to the ONS, down-revision in the deficit figure is now due to the £9 billion lower government procurement spending for the Covid-19 pandemic so far in 2020-21 than previously anticipated.
An economist at the Institute for Fiscal Studies, the think-tank, said the current public finances were 69 billion pounds better in 2020-21 than what the Office for Budget Responsibility predicted.
This could be an exaggeration; the sum of £30bn was due to expected defaults on government-backed loans to businesses that had not yet been taken into account by the ONS.
At the upcoming Budget on March 3, the chancellor will know that this year’s borrowing will be record-breaking, says Stockton.
To keep inflation low, governments may need to implement substantial net tax increases in the future.
After these lockdowns and extensions of government support for corporations and households, public sector net borrowing is likely to be below £400 billion in 2020-21.
Borrowing increased from £271 billion in the first ten months of 2020-21 to £222 billion, more than double the level of the worst year of the global financial crisis.
The big question was: How much revenue the government will have in 2021-22 to support the economy while it tries to reduce state support due to the pandemic’s downturn?
“GDP is expected to increase greatly next year, but income tax and national insurance will almost certainly be lower,” concluded Bell.
Source: Financial Times