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UK Treasury Doc Shows Deficit Increases, Tax Hikes Likely

By Matt Thompson · May 13, 2020, 4:09 PM EDT

An internal HM Treasury document is recommending severe spending cuts and significant tax increases as the U.K.'s budget deficit is expected to rise sharply this year because of economic fallout from the COVID-19 pandemic, a spokesperson confirmed Wednesday to Law360.

The document, dated May 5 and leaked to the Daily Telegraph on Tuesday, said the current most likely scenario is that the British budget deficit will be £337 billion ($412 billion) by the end of the current fiscal year. It was projected at £55 billion before the worldwide outbreak of the novel coronavirus, which causes COVID-19, a respiratory disease.

Tax increases and spending cuts could raise up to £30 billion by adding 5 pence on the pound to the basic rate of income tax, freezing pay in the public sector for two years or ending mandatory above-inflation pay increases for the state pension, according to the document.

An HM Treasury spokesperson, who wished to remain anonymous, confirmed the existence of the document and pointed to comments from Rishi Sunak, chancellor of the Exchequer, sent to reporters Wednesday.

"It's too early to speculate on these things … but what we do know is that we're facing a time of unprecedented economic uncertainty," Sunak said, citing statements from the Office of Budget Responsibility and the Bank of England, adding that the U.K. will face a significant increase in the deficit this year.

"What's clear is that if we had not acted in the way that we did at the scale and speed that we did, the situation would be far worse," Sunak said, defending the relief measures the country has put in place. "That's something that the OBR and the Bank of England have both confirmed."

On Tuesday, Sunak announced that a furlough plan to cover 80% of wages for those unable to work because of the virus would be extended until October, but that employers would need to begin picking up more of the bill by the end of July. The program is estimated to cost £100 billion, with almost 10 million workers now either paid by the government-funded initiative or by social security benefits.

According to the HM Treasury document, in the worst case, the U.K. would experience an "L-shaped economic decline," in which the deficit increases to £516 billion in the current fiscal year and rises to £1.19 trillion over five years.

In the best case, the British economy would experience a sharp fall in output followed by an equally fast recovery, and the budget deficit would still rise to £209 billion this year, the document said. Tax increases or spending cuts of £30 billion would be necessary even under the better scenario, the document said.

The document may signal that the U.K. government plans to embark on a course of austerity and tax increases, something critics said could aggravate an already bad situation.

"The risk is that governments will prioritize political communication over tax efficiency," said Gianmarco Monsellato, Deloitte EU tax policy leader, during a virtual conference Wednesday. "They will push new taxes which are not efficient ... rather than going for neutral tax systems that are much more sustainable for the economy." 

The New Economics Foundation, a center-left-leaning research group, also warned against raising taxes during the crisis, saying the economy needs money available for people to spend. Austerity measures that were imposed in the last decade shouldn't be repeated, the foundation said.

"Whatever government chooses, further austerity cannot be on the cards," the group said. "The huge and costly mistakes from the last decade must not be repeated."

--Additional reporting by Todd Buell. Editing by Neil Cohen.

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