The British government this week will become the first European government to explain to voters the high fiscal costs of the coronavirus pandemic.
Rishi Sunak, chancellor of the exchequer, said he will highlight Tuesday some difficult home truths about the consequences for public spending and tax rates.
Neighboring governments are lagging Britain in vaccine rollout and are still focused on the immediate public health crisis. But, analysts say, they are also starting to think about a post-pandemic road map for how to reduce record levels of public debt.
Although European Union leaders say “the risks of doing too little outweigh the risks of doing too much” when it comes to fiscal and monetary policy, they are not thinking along the same lines as Britain when it comes to taxes.
Sunak said Sunday the time has come to “level with people” about the problems facing the economy. On Wednesday, he will present in the House of Commons the annual government budget and is expected to announce a staged increase on the rate of corporation tax from 19% to 25% over the next four years.
Sunak is also likely to announce a “stealth tax” by freezing the lifetime allowance on pensions — the amount people are allowed to build up in their pension pot before facing punitive taxes.
He is also expected to freeze the threshold for when taxpayers must pay the top rate of income tax. That move will result in 800,000 people paying the top rate.
The British chancellor has reportedly told rebellious lawmakers from the ruling Conservative Party that he has little option but to raise taxes in the short to medium term but hopes to be in a position to cut them again before the next election in May 2024.
“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, and that’s not a good situation,” Sunak told a British broadcaster Sunday.
He said he is determined to keep supporting businesses impacted by the lockdown with grants and government loans, but “over time, what we need to do is make sure our public finances are sustainable.”
The chancellor is also expected to announce plans to tax internet retail more heavily, including a green tax on the delivery of goods bought online.
The plan to increase taxes is prompting a strong pushback from Conservative lawmakers. Some oppose tax hikes in principle; others fear the public will view what the government is doing as "playing politics."
David Davis, a former Conservative minister, said raising taxes and cutting them later is “not a wise political strategy, and certainly not a wise economic strategy.”
Others argue that the last thing the government should be doing now is raising taxes before a recovery has begun.
Former Prime Minister David Cameron has publicly opposed the plan to raise the corporate tax before Britain’s economic recovery is advanced. He compared the pandemic crisis to World War II.
“So, piling, say, tax increases on top of that before you’ve even opened up the economy wouldn’t make any sense at all,” he said to CNN last week. “I think it’s been right for the government here in the U.K. and governments around the world to recognize this is more like a sort of wartime situation.”
British government borrowing is at a record high, with a budget deficit for 2020 of around $558 billion. Britain's total debt stands at more than $2.79 trillion, just under 100% percent of GDP, according to the Office for Budget Responsibility.
British policymakers are not the only officials in Europe scratching their heads over how to pay for the pandemic without stifling economic recovery. They want to maintain fiscal and monetary support and continue to subsidize worker furloughs and offer grants and cheap loans to impacted businesses, but the costs are mounting to dizzying heights not seen before in peacetime.
In France, the national debt has topped $3.2 trillion and will soon exceed 120% of the economy.
Some government officials say they remain calm about piling up debt. Interest rates are rock bottom, thanks to low inflation allowing them to shield their economies from pandemic damage and to avoid mass unemployment. While the debt they are incurring has grown to exorbitant amounts, the costs of servicing the borrowing have not risen.
No government currently is talking about austerity and cuts in public spending, with many planning to borrow trillions more to fund future stimulus. They say they are counting on a strong post-pandemic recovery, resulting in healthy replenishments of government coffers.
The European Union has broken with its decades long insistence on member states to keep to strict limits on government deficits, and the European Central Bank has lent eurozone governments around $1.45 trillion.
Policymakers at the World Bank and the International Monetary Fund have been urging governments to spend their way out of the crisis.
“First, you worry about fighting the war. Then, you figure out how to pay for it,” Carmen Reinhart, chief economist at the World Bank, said recently.
But some economists warn that the question of how to pay for pandemic costs will soon start looming in earnest. They worry that high inflation could emerge, rapidly pushing up government borrowing costs, if governments continue to spend with abandon.