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The Coronavirus crisis could cost £25bn in extra annual tax.

  • Monday, May 18, 2020

Rishi Sunak, Chancellor of the ExchequerThe Treasury has assessed the full cost to the Exchequer of the Coronavirus crisis as being around £300bn this year. The recent report forecasts a deficit of £337bn far higher than previously estimated by analysts. The Chancellors Budget in March forecasted a deficit of £55bn. How times have changed.

These forecasts are based on an expected U shape recovery but if the UK manages a V Shape recovery, then the deficit may be limited to £209bn but if we suffer a L shape recession the coronavirus crisis could set us back over £500bn in this year alone and see the deficit rise to a dangerous £516bn.

The report stated that the U shape recession forecast will need £25bn in extra annual tax rises to cover the cost. This equates to an increase in the basic rate from 20% to 25%. The L shape recession would cost us £90bn in extra taxes or cuts.

These forecasts confirm that the British public finances are in their worst state since VE day and clearly explain why the government want to get the economy moving again.

The Office of Budget Responsibility (OBR) has just revised its figures for the cost of the coronavirus crisis up from £104bn to £123.2bn and expects UK borrowing to hit 15.2% of national GDP. On VE Day 1945 debt levels stood at 22.1% of national GDP.

The Chancellor Rishi Sunak, has extended the UK furloughing programme to run until October and has maintained the 80% wage subsidy level. The scheme will from August allow flexibility for returning workers to be part salary and part furloughed. This may lead to a rise in benefit claims in the summer as furloughed workers are let go. It is estimated that the furloughing scheme has so far cost £10bn and is now expected to cost £100bn by October. The scheme is currently covering the income of 7.5 million workers. This is very good news as far as keeping people in employment and paying wages while in lockdown is concerned, but soon those receiving just like everyone else will have to start paying the cost.

In order to pay for the massive increase to public finances the Treasury is now considering rises in income tax, capital gains tax, inheritance tax, VAT, national insurance and corporation tax. Officials are reviewing the triple lock on state pension benefits. This lock means state pensioners receive an annual increase which is the greatest of RPI, average earnings growth or 2.5%. The removal of the 2.5% rise will save the tax payer £8 bn every year.

Many economists have stated that a hike in taxation will not help but undermine the recovery, particularly when companies are facing new loan repayments. Others see growth in the economy as the best way to repay national debt. The Governor of the BoE, Andrew Bailey has suggested that the government can avoid austerity measures as he believes that the BoE can help spread the cost of the crisis over time.

In the treasury modelling for a worst-case recession scenario, the UK will maintain a structural deficit of up to £90bn a year, which is around 150% of UK GDP. The cost of debt repayments would be £65bn a year and hit public spending levels.

The choices facing the Prime Minister and cabinet on all fronts will be hard. The reality is that the battle to save the NHS will be lost for a long time if the economy flounders and the NHS as a result, underfunded.


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Chris Davies

Chris Davies

Chartered Financial Adviser

Chris is a Chartered Independent Financial Adviser and leads the investment team.