Rishi Sunak tax warning: Backlash as Chancellor plans major tax hikes to pay for Covid

Rishi Sunak questioned by Marr over election manifesto promises

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And Mark Littlewood, director of the Institute of Economic Affairs (IEA) has warned the chancellor against increasing the tax burden dramatically, suggesting such an approach could backfire – and make the situation even worse. Mr Sunak will make his Spring Budget statement on Wednesday against a backdrop of fevered speculation, with many experts suggesting he will push Corporation Tax up past its current rate of 19 pence in the pound as he tries to recoup some of the £300billion spent last year on mitigating the impact of the pandemic.

He is also expected to extend the furlough scheme beyond the end of April – when it had been scheduled to finish.

Mr Littlewood told Express.co.uk: “I would like a long term plan to keep the public finances under control.

“But there is virtually nothing he could do to stop the public finances worsening over the next year or two and that is in the context of them having been pretty bad since the turn of the millennium and all the way back to 2001, prior to the 2011 attacks, since the government lost balanced its books.

The trick, the magic, will be making sure that you get a methodical fashion, rather than trying to dial up taxes

Mark Littlewood

“So we got to get back to that but we don’t need to do it yet. If we look at the economy as a patient, what we need is rehabilitation, not extremely painful immediate surgery, which could backfire anyway.”

Dramatic spending cuts and tax hikes risked doing “more harm than good”, Mr Littlewood warned.

Balancing the books was “definitely the destination you want to get to”, he acknowledged.

However, he added: “The trick, the magic, will be making sure that you get a methodical fashion, rather than trying to dial up taxes.

“COVID and the costs of the lockdown has substantially worsened the public finances.

“They were not in a good state even without COVID.

“The trick is that most of the heavy lifting is going to be done on expenditure reductions, rather than tax rises.”

Mr Littlewood stressed: “We are right now at the highest tax burden in the UK, as a percentage of national income that we experienced for 70 years and that really is quite extraordinary and it might go up still further and we are probably at the taxable limit.

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“If we start putting taxes up still higher we risk depressing economic growth, reducing employment, reducing entrepreneurialism, and actually less in to the exchequer because we will put rates up to punitive levels.

“We are witnessing now a Government which is squeezing pretty much every penny it can out of the private sector. They can squeeze perhaps a couple of drops more but we are getting very, very close to the cloth being bone-dry, it is squeezed so much.”

Over the next few months and years, Mr Sunak would have to signal how he was going to reduce expenditure and bring about sustained economic growth, Mr Littlewood said.

As for what the Chancellor would announce this week, he added: “I think he is going to modestly dial up tax in a couple of areas, possibly Capital Gains Tax, possibly Corporation Tax.

“There’s also the possibility that he might do something on property taxes, or digital services taxes – I wouldn’t be wholly surprised there as well.

”I don’t think he will enormously increase tax levels.

“My worry is dialling it up a notch or two, or indeed failing to reduce it risks, making the economic recovery from COVID are in lockdown considerably longer and more painful.”

Nevertheless, he predicted Mr Sunak would likely be tempted to look at the enormous cost to the exchequer of the pandemic, and conclude it was reasonable to try and recoup some of this cash from companies which were still turning a profit.

Mr Littlewood said: “So if companies have had a good, profitable pandemic then they need contribute to the wider costs of the country dealing with that.

“I am not expecting the biggest tax rising budget in history or anything like that but I suspect by time he sits down the tax burden will be slightly higher than it was when he stood up.

“What I would like is for him to be somewhat more relaxed about the immediate hole in the public finances, and I say that as somebody who keeps an extremely watchful eye on these things and who thinks that our public finances, have been, are and will continue to be in a dire state, and that surgery at some point, is needed.

“But I don’t think that surgery is needed right now.”

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