Boris Johnson has been warned by senior Conservatives that he risks “entrenching” the impact of the coronavirus crisis if he raises taxes or cuts spending.
An internal Treasury document said that the pandemic would cost the exchequer almost £300 billion this year and could require income-tax rises, a two-year public pay freeze and an end to the triple lock on state pensions.
One cabinet minister said that such an approach risked jeopardising growth and suggested that the additional borrowing should instead be treated like a wartime debt and repaid over decades. “It is completely the wrong approach; it would entrench the downturn,” the minister said. “We should be looking at policies that open up the economy — we will need fiscal stimulus. Taxes need to be lower rather than higher.”
The Treasury document set out a proposed “policy package” of tax rises and spending cuts and forecasts that Britain would have a £337 billion budget deficit this year, against £55 billion in the March budget. It suggested that tax rises and spending cuts that would raise up to £30 billion may be needed to help to fund the increased level of debt.
Official figures showed yesterday that the economy contracted by the fastest rate on record in March, with forecasters suggesting that GDP could fall by up to 30 per cent in the second quarter. Paul Johnson, head of the Institute for Fiscal Studies, warned that Britain was facing a “mega-recession”.
The Treasury document suggests that the chancellor should announce a medium-term plan for the public finances in the summer to “enhance credibility and boost investor confidence”.
Lord Lamont of Lerwick, a former Tory chancellor, said: “In the short run one should let the recovery take hold, not abort the recovery with fiscal adjustments, be they tax increases or spending cuts. But over time the problem of borrowing and the deficit will have to be addressed.”
Concerns were also raised by the former Labour chancellor Lord Darling of Roulanish, who oversaw Britain’s response to the 2008 financial crisis. He said: “My view is that, yes, the debt levels are going to be high but the government is going to have to carry that as it did in World War Two. When the economy is being deliberately suppressed as it is now for very good reasons the last thing you want to do is suppress it even further.”
However, some senior Tories warned that Mr Johnson might be forced to break his election pledge not to raise income tax, national insurance or VAT if the economy suffers permanent damage. “The big question the prime minister will have to consider is whether he is prepared to break his manifesto pledges,” one cabinet minister said. “We are all in this together and the public could be more forgiving.”
Mel Stride, a Tory MP and the chairman of the Treasury select committee, also suggested that taxes may have to rise if the economy does not “bounce back”. He said: “The government is likely to have to lean into at least some level of spending control and tax increases. There are going to be some very, very difficult decisions ahead.”
The former Tory leader Sir Iain Duncan Smith called for the additional borrowing to be treated like a “wartime debt”. He said: “What we cannot do is exit from this and enter into a period of clawback. That would defeat the objective of growing the economy. Growth is going to be critical.”
The Treasury document, detailed by The Daily Telegraph, says that in the worst-case scenario, an “L-shaped economic decline”, the deficit would rise to £516 billion in the present financial year. This scenario would require £90 billion in spending cuts or tax rises. The best-case scenario, a V-shaped recovery, is described as optimistic and would still lead to a £209 billion deficit this year.
Mr Shapps said that he did not recognise the figures but promised: “We are not going back to the world of austerity.”
Downing Street indicated that the prime minister did not want to freeze public-sector pay. Mr Johnson’s official spokesman said he was “not going to forget” the work of frontline public-sector workers during the coronavirus crisis.
John Apter, chairman of the Police Federation, said that freezing the wages of public sector workers would be “morally bankrupt”.
Rishi Sunak, the chancellor, said that it was “premature” to think about tax rises or public spending cuts but refused to rule them out.
Andrew Bailey, the governor of the Bank of England, was asked last night by ITV whether a new round of austerity would be needed. “I think there are choices,” he said. “And I hope those choices will be looked at very seriously.”
In an interview with Robert Peston, Mr Bailey said: “One of the reasons that the Bank of England is acquiring a much larger stock of government debt than if you go back to the financial crisis would have been imagined is that I think what we can do is help to spread over time the cost of this thing to society. That to me is important. We have choices and we need to exercise those choices.”
