Tax hikes or austerity needed to pay for Covid spending, warns IFS

Ben Zaranko, economist at the IFS, said: “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.”

If just a quarter of the extra Covid-19 spending becomes permanent, the think tank said this will eat up almost half of a £40bn rise in department spending planned between 2020-21 and 2023-24.

Government departments have spent an extra £70bn on day-to-day public services because of the virus, in addition to a host of one-off bills including £39.3bn for the furlough scheme and £7.8bn of grants to help the self-employed. 

The massive ramp-up in public spending has pushed borrowing to record levels and brought government debt above £2 trillion for the first time.

The Autumn Budget has been cancelled but Mr Sunak is still pressing ahead with a spending review that will set department budgets for several years.

But in a chapter of its upcoming Green Budget, the IFS argued that the spending review should cover only one year rather than three or four given the huge economic uncertainty.

Mr Zaranko said it is an “extraordinarily difficult time for the Chancellor to be formulating public spending plans”.  Covid has “blown previous spending plans out of the water”, he warned.

Treasury documents in July revealed the huge cost of fighting the virus outbreak, with £15bn spent on PPE and £10bn on the test and trace system – a combined bill higher than the annual budget of the Department for Transport.

The spending review was expected to mark another step away from the austerity era. But Covid has sent public debt surging from 80pc of GDP in 2018-19 to above 100pc, its highest level since 1963.

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