The Government should abandon any plans for setting out a multi-year spending review due to the unprecedented uncertainties facing the economy, a think tank has said.
The Institute for Fiscal Studies (IFS) said Chancellor Rishi Sunak should instead set a one-year plan and focus on how much of the £70 billion spent on the Covid-19 pandemic this year will be required in future Government budgets.
Economists also warned a theoretical income tax rise of 6p or 7p for every £1 earned would be required to cover the predicted £50 billion to £60 billion extra public spending over the next five or six years.
However, IFS director Paul Johnson said: “It is entirely inappropriate for the Chancellor to consider raising taxes this year or next, or possibly even the year after.
“The longer term answer is clearly, if we have a bigger state we will need more tax and, if we think the state is going to be 2% to 3% bigger than we’re spending, then that’s probably the magnitude you would have to raise taxes, and that’s a lot.”
The calls come as a new report by the IFS looks at how much money has been spent and what options are open to the Government.
It finds that spending has increased 20% above the Government’s original plans before the pandemic.
The majority of the extra spending has been on the Department of Health and Social Care, with £15 billion spent on PPE and £12 billion on rolling out the Test and Trace programme.
The IFS said budgets could be cut on building new railways, roads and infrastructure, although this would fly in the face of the Conservative Party manifesto of “levelling up” the north of England.
Economists found the Government’s initial plans for spending next year would have seen public service spending rising by 10.7% in the next three years, enough to reverse two-thirds of the cuts to per-person public service spending over the past decade.
But Ben Zaranko, a research economist at IFS and the author of the research, said those numbers are now redundant.
He explained: “The immense economic uncertainty associated with the Covid-19 pandemic, and the looming end of the Brexit transition period, make this an extraordinarily difficult time for the Chancellor to be formulating public spending plans.
“Covid-19 has blown previous spending plans out of the water, with more than £70 billion allocated to departments this year for day-to-day spending as part of the response to the virus.
“If some of these spending programmes, such as the running costs of NHS Test and Trace, are to be unfortunate facts of life for years to come, they could swallow up huge amounts of money, and leave some public services facing another round of budget cuts for their core services.
“Avoiding that scenario would require the Chancellor to find billions of extra funding, paid for at some point through higher taxes.”
The rises would be needed and the IFS predicts public spending as a percentage of national income could rise from 39.8% at present to 41% by 2025, adding around £60 billion to the public spending bill, it said.
That would equate to around 6p or 7p on every pound earned in extra income tax although it could depend on whether it is added to the higher tax band or elsewhere.
Economists have also argued that any tax rises should be through either income tax, national insurance or VAT changes, as they produce the biggest results.
A Treasury spokesperson said: “The Spending Review will proceed this Autumn, as planned. The Chancellor has already confirmed that departmental spending will increase above inflation – both for day-to-day spending and longer-term investment.”