News, Culture & Society

Britons face pay freezes and tax rises to cover £300bn bill for coronavirus

Britain’s bill for the pandemic could hit £300billion and force tax rises, cuts to the state pension and a public-sector pay freeze, a Treasury document warns.

A paper drawn up for Chancellor Rishi Sunak said the austerity-style policies – including drastic cuts to public spending and welfare – may have to be announced within weeks to boost confidence in the economy.

It could lead to rises in income tax, VAT and national insurance, as well as an end to the pension triple lock guaranteeing the state pension rises each year by the highest of inflation, earnings growth and 2.5 per cent.

New green taxes or levies targeted towards the NHS or social care are also being considered. The leaked document, seen by The Daily Telegraph, reveals a ‘base-case scenario’ of a £337billion budget deficit this year, compared with the forecast £55billion in March’s Budget.

Dated May 5 and marked ‘official – market sensitive’, it says tax rises and spending cuts that would raise between £25billion and £30billion – equivalent to a 5p increase in the basic rate of income tax – would be needed to fund the increased debt.

In the worst-case scenario, the deficit would increase to £516billion this year, rising to £1.19trillion over five years. This would need up to £90billion in annual tax rises or spending cuts in the coming years. Even the best-case scenario, in which the economy recovers quickly, would lead to a £209billion deficit. This is described as ‘optimistic’. 

The prediction suggests the UK economy could be in its worst state since 1945.

And an independent survey of small firms has found that one in three may never reopen, adding to the Government’s woes.

The survey of more than 5,000 British companies, published by the Federation of Small Businesses, also found that seven in ten of the respondents are using the job retention scheme.

However, one in three employers are considering or have already made redundancies in their workforce, raising concerns over planned changes to the scheme in August.

The latest extraordinary developments on coronavirus came as:

  • The UK announced 425 more coronavirus victims in hospitals, taking the official death toll to 32,490 – but separate statistics suggest the true number of fatalities could be closer to 45,000; 
  • Health Secretary Matt Hancock has warned that people are unlikely to be able to go on foreign holidays this summer. Asked whether ‘summer was cancelled’, Mr Hancock told ITV’s This Morning: ‘I think that’s likely to be the case;
  • Shadow chancellor Annaliese Dodds has indicated she might not send son Freddie, six, back to school next month, claiming the Government has not produced enough evidence it is safe;
  • Commuters have been urged to walk the last mile of their journeys, wear a mask and face away from each other, as the government mounts a push to get more workers back in action; 

A paper drawn up for Chancellor Rishi Sunak said the austerity-style policies – including drastic cuts to public spending and welfare – may have to be announced within weeks to boost confidence in the economy

Mike Cherry, the federation’s chairman, said that the Government support through the furlough scheme, as well as other grants and loans, would need to be carefully tapered away.

‘The economy will not go from zero to a hundred overnight once we’re into the recovery phase. The crucial support that’s on offer needs to be kept under review as we chart a course back to economic recovery,’ he told The Times. 

The Treasury document warned that if the economy does not recover soon, the country could be thrown into a 1976-style sovereign debt crisis that could require an international bailout.

Three scenarios, in the forms of ‘L’, ‘U’, and ‘V’-shaped recoveries, were also included in the document to express expectation for the different levels of economic fallout that could be experienced.

In the worst-case ‘L-shape’ scenario the deficit would rise to £516bn by the middle of 2021, and total £1.19 trillion over the next five years. The level of debt would require an estimated £90bn in revenue for the Treasury. 

The best-case ‘V-shaped’ scenario, described as ‘optimistic’ in the document, would lead to a £209bn deficit this year.

Mr Sunak is advised that to ‘stabilise debts’ in the base-case scenario he will have to increase taxes or cut spending to raise between £25billion and £30billion a year.

The document says the Chancellor ‘has indicated a preference for accepting a higher but broadly stable level of debt’ after the crisis. A Treasury spokesman said: ‘The Government’s focus is on supporting families and businesses.’

Yesterday, Mr Sunak announced the furlough scheme, which is estimated to cost £60bn, would be extended until October but employers would have to pick up more of the bill from the end of July. 

Tweeting following the announcement of the extension in the House of Commons, Mr Sunak said: ‘I won’t give up on the people who rely on the Coronavirus Job Retention Scheme.

‘We stood behind Britain’s workers and businesses as we came into this crisis, and we will stand behind them as we come through the other side.’ 

Labour has urged Boris Johnson and Rishi Sunak to reject public sector spending cuts as a way of paying off the cost of the coronavirus crisis following reports that measures including tax hikes and a pay freeze are being considered.

The paper said measures including income tax hikes, a two-year public sector pay freeze and the end of the triple lock on pensions may be required to fund the debt.

The document is said to state: ‘To fill a gap this size (in the public finances) through tax revenue risers would be very challenging without breaking the tax lock.

‘To raise fiscally significant amounts, we would either have to increase rates/thresholds in one of the broad-based taxes (IT, NICS, VAT, CT) or reform one of the biggest tax reliefs (e.g. pensions tax).’  

The Treasury declined to comment on the report, but it is understood that the document is one of many put together by different teams to discuss ideas about future policy. 

Shadow chancellor Anneliese Dodds said: ‘A lack of resilience in our public services, caused by 10 years of underfunding, has made it harder to deal with the challenge of coronavirus.

‘After all our public services and key workers have done to save lives during this pandemic, there must be no return to a society where we lack that resilience.

‘Both the Chancellor and the Prime Minister must urgently make a statement rejecting these plans.’

What is happening to the furlough scheme? 

The multi-billion pound furlough scheme is being extended to October.

Employees on the scheme will continue to receive 80 per cent of wages, up to a ceiling of £2,500 a month. 

Until the end of July, there will be no changes to the scheme whatsoever.

From August to October there will be ‘greater flexibility’ so furloughed employees can return to work part-time.

Businesses will be expected to share the costs of paying their salaries from this point – meaning some that remain largely shut will have to choose whether to make people redundant. 

Further details of the arrangements will be announced by the end of the month.

The Conservatives pledged in their manifesto at the general election last year that the party would not raise the rate of income tax, VAT or National Insurance, and would keep the pensions triple lock.

As Rishi Sunak extended the government’s massive coronavirus bailout to the autumn, businesses faced concerns they could have to stump up as much as half of furloughed workers’ emergency coronavirus pay even if they remain closed. 

Workers will still get 80 per cent of wages up to a ceiling of £2,500 a month, and from August there will be ‘flexibility’ for them to go back part-time, the Chancellor told MPs this afternoon.

But from that point firms will have to cover a proportion of wages even if they are still largely shuttered and cannot use their staff, raising the risk that some will choose to make people redundant.

At the daily press conference tonight, Alok Sharma, the Business Secretary, was asked whether people in as many as a million of the 7.5 million jobs on the furlough scheme were ‘effectively unemployed but don’t yet realise it’, but he could only respond by listing grants and loans being offered to businesses.

Treasury sources said how the burden is divided has yet to be decided, but suggested the government would foot more than 50 per cent – with the suggestion firms can use money they have received from other sources, including emergency business loans and grants underwritten by the Government. More detailed plans are expected to be published by the end of the month.  

Hospitality and leisure businesses such as pubs, restaurants, cinemas and gyms will be among the last wave of high street commerce that will be allowed to reopen. The earliest that may happen is July, and that is if there are no setbacks in the lockdown that forces restrictions back into effect. 

Kate Nicholls, UKHospitality chief executive, warned the Government that firms in the sector could need to keep receiving the full 80 per cent of salary costs because hotels and restaurants will still be unable to open.

‘The full 80% may need to be extended past July for some businesses in sectors like hospitality that will still operate at much reduced levels of trade, or not yet be able to open,’ she said.

‘Our businesses will need as much warning as possible if they are to be expected to plan ahead for eventual venue reopenings.’

Alok Sharma, the Business Secretary, was asked at the daily press conference whether up to one million people on the furlough scheme were 'effectively unemployed but don't yet realise it' amid concerns firms could lay off staff if they are asked to pay a share of salary costs while still closed

Alok Sharma, the Business Secretary, was asked at the daily press conference whether up to one million people on the furlough scheme were ‘effectively unemployed but don’t yet realise it’ amid concerns firms could lay off staff if they are asked to pay a share of salary costs while still closed

GMB union General Secretary John Phillips said that while the extension was welcomed, but demanded companies be given more details to avoid job cuts.

‘Continued support for the Job Retention Scheme is crucial, but muddled advice on who should be working means many well-intentioned employers, who want to keep their staff furloughed, will find themselves competing with unscrupulous companies who want to drag their staff back before it is safe to do so.  

‘The Government needs to be clear, if companies don’t know what’s coming down the tracks we’re going to see job cuts.

‘Don’t underestimate bosses’ commitment to the the bottom line, it’ll send workers to the breadline.’

Gerard Toplass, founder of the BusinessBounceBack campaign and executive chairman of two construction firms, said he expects there to be ‘one million people who are not necessarily going to go back to the job they had’.

The entrepreneur added that businesses want guidance now to help them plan their return to work in a different economy to the one just weeks before. 

‘I think it is right that it [furloughing] is being phased out, but the government does need to give people sufficient time so that they can plan properly,’ he said.

‘You have some employers who will clearly be thinking about what their demand is going to look like, and they will be making decisions about that now. Irrespective of what support is out there, they will make decisions that they believe are right for their businesses.

‘I think the Government needs to balance the way it releases businesses, particularly in the retail and hospitality sectors, in a way that allows them to be safe and responsible, but allows them to ‘paddle their own canoe’.’

Experts say the cost to the public purse up to August is now expected to hit £60billion, and the final bill will be even higher. 

It is also unclear whether support is being continued for the self-employed, amid rumours that those with profits over £30,000 could be excluded from the help, rather than £50,000 as at present. 

Shadow chancellor Anneliese Dodds said: ‘The government must clarify today when employers will be required to start making contributions, and how much they’ll be asked to pay. 

‘If every business is suddenly required to make a substantial contribution from the August 1 onwards, there is a very real risk that we will see mass redundancies.’

Rishi Sunak concedes recession is already happening in grim warning of hard times to come as he extends the furlough scheme again

By Jason Groves for the Daily Mail

Rishi Sunak extended the coronavirus job subsidy scheme until the end of October as he conceded yesterday that the UK is already in recession.

In a fresh sign that ministers believe Britain faces a long haul to economic recovery, the Chancellor said it was already clear that the furlough scheme would have to go well beyond its current deadline of the end of June.

Mr Sunak revealed that the scheme, which sees the taxpayer subsidise 80 per cent of wages up to a maximum of £2,500 a month, is already supporting an astonishing 7.5million jobs.

Chancellor of the Exchequer Rishi Sunak extended the furlough scheme deadline beyond June, as originally set out, as he conceded the UK is already in recession

Chancellor of the Exchequer Rishi Sunak extended the furlough scheme deadline beyond June, as originally set out, as he conceded the UK is already in recession

He told MPs that the scheme would continue ‘completely unchanged’ until the end of July – despite warnings it could cost taxpayers more than £80billion.

After that, people who have been furloughed will continue to receive 80 per cent of their wages, but their employer will be asked to make a contribution towards the cost. 

The scheme will also be tweaked to allow furloughed staff to start returning to work part-time from as little as one day a week – an idea that has been a key demand of business.

The extension was welcomed by both unions and business last night. The scheme has been accessed by 935,000 businesses since March and has already cost £10billion.

The move came as ministers braced themselves for official GDP figures which are expected to show the economy went into reverse in the first three months of this year, even before the impact of the lockdown was felt. 

The job retention scheme is credited with shoring up millions of jobs that would otherwise have gone as the Government ordered the closure of huge swathes of the economy.

Sunak's extension of the furlough scheme, which has already cost £10billion, was welcomed by both unions and business last night

Sunak’s extension of the furlough scheme, which has already cost £10billion, was welcomed by both unions and business last night 

Despite this, some 1.8million people have signed up for Universal Credit since the lockdown began.

Asked whether the country faced an inevitable recession, Mr Sunak told the BBC: ‘We already know that many people have lost their jobs and it breaks my heart. 

‘We’ve seen what’s happening with Universal Credit claims already. This is not something that we’re going to wait to see, it’s already happening.

‘There are already businesses that are shutting. There already people who have lost their jobs. That’s why I’m working night and day to limit the amount of job losses.’ 

The Treasury declined to say how much the scheme was now likely to cost but Capital Economics predicted it could be £87billion, while the Institute for Fiscal Studies said it could cost almost £100billion by the end of October.

Last night Mr Sunak suggested the scheme, which will now run for at least eight months, was costing about £8billion a month.

From today, the self-employed will be able to apply for income support dating back to March.

But it is not yet known whether support for them will also be extended. Paul Johnson, director of the Institute for Fiscal Studies, said the generosity of the scheme might mean that some businesses remain closed ‘for longer than is absolutely necessary’.

But he added: ‘Maybe that is a lesser risk than people going back when it’s unsafe.’

Len McCluskey, general secretary of the Unite union, welcomed the extension, while the British Chambers of Commerce said it was a ‘huge help and a huge relief for businesses across the UK’.