‘Taxes to rise and curb on pensions’

Warning of £300bn bill as we face recession to end them all

TAX rises and curbs to state pensions could be needed to help fix a £300billion black hole in the public finances, Downing Street acknowledged last night – as official figures suggested Britain is entering a ‘mega recession’.

No 10 warned the coronavirus crisis had created ‘unprecedented economic uncertainty’ – and refused to say whether Tory manifesto pledges on tax and pensions still stand.

The possibility of tax rises alarmed Tory MPs last night, with former minister Steve Baker warning that the UK was ‘already at the taxable limit’.

The warning came as official figures showed the economy shrank by 2 per cent in the first three months of this year – the sharpest contraction since the global financial crisis of 2008. In March, as the lockdown began, GDP fell by 5.8 per cent, the biggest monthly contraction on record.

Chancellor Rishi Sunak said it was ‘very likely the UK economy will face a significant recession this year and we are in the middle of that as we speak’.

He said the official data underlined why the Government had taken ‘unprecedented action’ to support jobs by committing to subsidising the wages of 7.5million furloughed workers until the end of October. Paul Johnson, director of the Institute of Fiscal Studies, told BBC Radio 4’s World at One: ‘It’s a mega recession, it’s a recession to end all recessions in terms of its scale.

‘The second quarter is going to be much more dramatic with a quarter of the economy pretty much shut down.’ Predicting the economy will shrink by more than 25 per cent in the second quarter, he added: ‘We can get over a year of misery and bounce back but I don’t know how fast the bounce back is going to be’.

Leaked Treasury analysis yesterday revealed ministers have been told to expect Britain’s budget deficit to soar to £337billion this year because of the lockdown.

Although Mr Sunak is said to have accepted that the crisis will leave the UK’s long-term debt higher, the Treasury paper suggests he will have to find up to £30billion a year just to service the increased debt.

Whitehall sources played down the significance of the document, saying ministers were focused on addressing the immediate crisis.

One source described the document as ‘total garbage’ – and suggested early tax rises were unlikely.

Mr Sunak said it was ‘premature to speculate’ about how the huge cost of dealing with the crisis would be paid for.

But the Treasury document warns that it is likely to involve a package of tax rises and spending cuts in the longer term.

It states that it will be ‘very challenging’ to raise this sum without breaking Boris Johnson’s ‘tax lock’ – a manifesto pledge not to raise income tax, National Insurance or VAT.

It also suggests that ‘stopping the rising cost’ of the pensions triple lock could produce savings of £8billion a year. The triple lock guarantees that pensions will rise by at least 2.5 per cent or in line with inflation or average earnings, whichever is highest. This was also guaranteed in the Tories’ manifesto in December.

The PM’s spokesman refused to say whether such manifesto pledges still stand, saying: ‘It’s too early to speculate about any future decisions. We’re facing a time of unprecedented economic uncertainty and we remain committed to the agenda that was set out in the Budget.’

THE bare statistics won’t mean a great deal to most people.

The UK economy shrinking by 2 per cent in the first three months of this year. A 1.9 per cent fall in services output. GDP down by 5.8 per cent in March.

But these numbers presage a recession that could be more costly than anything we have seen since the post-war slump. Let’s put just one of them in context. In the year following the 2008 crash, our economy shrank by 6 per cent.

This year, we have seen a similar fall in March alone. And there’s worse to come.

Treasury officials estimate the Covid crisis may cost Britain £300billion this year, which could necessitate steep tax rises, a public sector pay freeze and an end to the state pension triple-lock.

Meanwhile, the Bank of England predicts a 14 per cent contraction over the year (the sharpest since 1706), with unemployment possibly doubling to nearly three million.

Thankfully, there are crumbs of comfort. First, the crisis was not caused by economic failings – just a malignant germ.

Before it struck, our economy was generally robust. Once it’s vanquished, we have the tools to rebuild quickly.

Furthermore, Treasury forecasts are notoriously gloomy. By contrast, the Bank of England suggests that while the recession may be deep, we can quickly bounce back.

The speed of recovery, however, will not be helped by tax rises. Low taxes foster enterprise and productivity.

The most important thing right now is to defibrillate our gasping economy.

Yes, the working environment must be made as safe as possible, but the longer we stay idle, the more jobs will be lost.

However gradually, the country must get back to work.