Sunak Can Forget About Balancing Britain’s Books, IFS Says

(Bloomberg) -- Chancellor of the Exchequer Rishi Sunak probably won’t make good on his pledge to “balance the books” as the fallout from the coronavirus pandemic drags on, according to a leading think tank.

The Institute for Fiscal Studies said tax increases equivalent to over 40 billion pounds ($52 billion) today will be needed by 2024-25 merely to stop debt soaring from its current levels above 100% of gross domestic product. Even then, Britain will be borrowing around 80 billion pounds a year to fund its spending.

The analysis comes a week after Sunak spoke of a “sacred responsibility” to repair battered public finances at a time when many economists and the International Monetary Fund are warning against a premature withdrawal of fiscal support. “This Conservative government will always balance the books,” he told his party’s annual conference.

In its Green Budget published Tuesday, the IFS and Citigroup Inc. said hopes of erasing the deficit are unrealistic, with the economy set to be 5% smaller by the middle of the decade than forecast before the pandemic struck.

“A safe bet would be to say this Conservative government will never balance the books, and I wouldn’t advise that they try anytime soon,” said Carl Emmerson, deputy director of the IFS. Further support to cement the recovery may even be justified, he said.

Any pressure on Sunak to increase taxes is not coming from debt markets, where yields remain near record-lows, thanks in part to huge Bank of England bond buying in the secondary market.

But the IFS warned that the large stock of bonds now held by the BOE leaves the government more exposed to increases in short-term interest rates. Debt-interest costs could rise by around 20 billion pounds by the middle of the decade if yields were to increase by 1 percentage point, it estimates.

Work on the Green Budget, the IFS’s annual scenario-setting exercise, began before Sunak announced last month he was canceling the Autumn Budget because of the uncertainties facing the economy. His tax and spending plans will instead be unveiled in the spring.

By then, the shape of future ties with the European Union will be clearer. Britain will have either secured a Brexit trade deal or reverted to World Trade Organization rules, meaning tariffs, costs and border disruptions for companies.

In the analysis, Christian Schulz, chief U.K. economist at Citi, said a “thin” trade deal could cost Britain 2% of GDP next year and failure to reach any agreement as much as 3%.

With the prospect of a V-shaped recovery diminishing, “we expect the BOE and the Treasury will do more to support businesses and households through these troubled times,” he said.

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