The report, drawn up for Chancellor Rishi Sunak, describes a “policy package” which may have to be published within weeks in order to “enhance credibility and boost investor confidence” in the British economy. The document says the Chancellor “has indicated a preference for accepting a higher but broadly stable level of debt” after the crisis.
But it added: “As debt is likely to reach significantly higher levels after the crisis, it will be important to stabilise the debt-to-GDP ratio and prevent debt from continuing to grow on an unsustainable trajectory”.
The document advises Mr Sunak that it is now likely to become necessary to break at least one of the Conservatives’ main manifesto promises not to increase taxes or scrap the triple lock on state pension increases.
It stated: “To fill a gap this size [in the public finances] through tax revenue risers would be very challenging without breaking the tax lock.
“To raise fiscally significant amounts, we would either have to increase rates/thresholds in one of the broad-based taxes (IT, NICS, VAT, CT) or reform one of the biggest tax reliefs (eg pensions tax).”
It adds that it would be “economically better to break the tax lock to achieve revenue of this scale than attempt to raise this level of revenue.”
It would also be “important to consider measures that support a growth-friendly composition of tax (consumption/property taxes rather than taxes on income/profits).
“We should also look at opportunities for new taxes that could meet some of the Government’s broader policy objectives, raising revenue to relieve long-term fiscal pressures (eg an NHS/social care surcharge or new carbon/green taxes).
“A one percent increase in the basic rate in the basic rate of income tax would raise around £5 billion p.a.”
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However, it added: “The timing of an effective medium-term strategy should also take into the account the right time to use political capital, and there may be benefits to setting out future consolidation plans now alongside support for the recovery.”
The document, designed by the Chancellor’s policy advisers, says “a more realistic scenario” than the suggestion of a V-shaped recovery is a “prolonged recovery and some permanent damage to the economy” – that would mean it is a U-shaped recovery.
A Treasury source described the actions laid out in the document as “a summary of all the existing levers” rather than a suggestion of any specific plan of action, and said no decisions had yet been taken about revenue-raising policies.
The report shows that the Treasury’s own base case scenario – or what it considers most probable – calculates that the current budget deficit, forecast at £55 billion for 2020-21 before the pandemic, will actually be £337 billion because of the cost of bailouts and lost tax revenues.
The base case puts the deficit at £83 billion in 2021-22, falling to £32 billion by 2024-25.
In a worst case scenario it will be £516 billion, or £450 billion more than predictions before the crisis .
That diminishes the budget for NHS England, which is currently at £129 billion.
A Treasury spokesman said: “The Government’s focus is on supporting families and businesses through this difficult period.
“That’s why we announced an extension to the furlough scheme, which has already saved millions of jobs, earlier.”