Sunak hints at tax rises in UK budget

British chancellor Rishi Sunak.

The UK’s chancellor Rishi Sunak has promised he will be “honest” with the British public, signalling potential tax rises ahead to fill the gaping hole in the UK’s finances wrought by the pandemic.

“We do have a challenge in our public finances and if we don’t do anything, borrowing will continue to be at very high levels even after we’ve recovered from Covid; debt will continue to rise indefinitely,” Mr Sunak said. “That’s not a good situation.” 

Speaking before the UK’s Wednesday budget release, he said he will “level with” the public and outline a blueprint to address the country’s deficit in a fair way.

His comments hint at tax rises and spending cuts to close a budget deficit that the UK’s Office for Budget Responsibility has said is on course to swell to £394bn (€454bn) (or 19% of the UK’s GDP) this year. 

The Institute for Fiscal Studies has estimated Mr Sunak may need to bring in tax increases of about £60bn in coming years to balance the UK’s books.

Officials have already suggested that US plans to raise corporate taxes give the UK scope to do likewise, while still retaining the lowest rates in the Group of Seven major industrialised economies.

“The rise in bond yields over the past month, if it sticks, would mean debt interest costs as a share of GDP average 1.2% over the five years rather than 1%. Debt servicing costs have averaged 1.7% since 2000,” said Bloomberg senior UK economist Dan Hanson.

The UK chancellor reportedly plans to freeze the thresholds at which people start paying both the basic rate of income tax and the higher rate, pushing 1.6 million people into a higher bracket before the UK’s next general election in 2024.

Mr Sunak refused to comment on specific fiscal measures, including when asked whether freezing income tax thresholds was consistent with the Conservative Party’s election manifesto pledge in 2019 not to raise the three main rates of tax: income tax, national insurance and value-added sales tax.

Conservative Party grandees including former chancellors Ken Clarke and Norman Lamont as well as opposition Labour Party Leader Keir Starmer have warned against putting up business taxes in the upcoming budget.

• Bloomberg