LONDON—The U.K. became the first major economy to set plans to repair the damage to government finances caused by the coronavirus pandemic, saying it will raise taxes after the economy recovers from its worst downturn in more than 300 years.
In a possible bellwether for other wealthy countries, the U.K. said Wednesday that it would raise taxes starting in 2023 to cover the heavy costs of the pandemic, as new official forecasts showed a rapid vaccination drive means the economy is on course to make up ground lost to Covid-19 sooner than previously hoped.
The decision puts the U.K. first among its peers to explain how it will pay for the massive government programs aimed at keeping millions of businesses and households afloat over the last year. The U.K. suffered the worst downturn among the Group of Seven advanced economies in 2020 and experienced one of the deadliest coronavirus outbreaks in the world.
The planned tax increases would reverse a decadeslong decline in the corporate tax rate that began in the early 1980s under the leadership of Margaret Thatcher.
Britain is on course to recover later this year as a speedy vaccination drive paves the way for reopening its economy. The U.K. has so far administered at least one dose of vaccine to almost one-third of its population, and plans to offer vaccination to all adults by the end of July. The U.S. has so far vaccinated around one-fifth of its citizens. The European Union has given shots to 7.5% of its population.
Forecasts from the Office of Budget Responsibility, the U.K.’s fiscal watchdog, show the economy is expected to recover its pre-pandemic size by the second quarter of 2022. That is six months sooner than the body forecast in November, and brings it into line with expectations of recovery across the European region.
U.K. Treasury chief Rishi Sunak said Wednesday he would extend support for idled workers and businesses at least until September, with a mix of measures including taxpayer subsidies for employer payrolls, tax breaks for closed businesses and grants to the self-employed.
He added, though, that government borrowing is set to reach its highest level as a share of national income since World War II, and said that once a recovery is under way, the government will need to begin fixing public finances. Government borrowing is forecast to fall from 17% of national income in the current fiscal year to 10.3% next year, with total debt peaking at over 97.1% of national income in 2023-24.
Mr. Sunak set out plans to raise the corporate tax rate to 25% from 19% from April 2023 and to freeze tax-free allowances on personal income. Together, the measures are forecast to raise 65 billion pounds, equivalent to around $91 billion, for the Treasury through the fiscal year ended March 2026.
“Coronavirus has caused one of the largest, most comprehensive and sustained economic shocks this country has ever faced,” Mr. Sunak said.
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U.K. government bonds, known as gilts, sold off as investors anticipated an increase in new bond issues. The benchmark 10-year bond yield rose as high as 0.789%, up from 0.704% Tuesday.
The plans announced by Mr. Sunak comes as Congress considers a $1.9 trillion relief package proposed by President Biden. That would be a much larger stimulus than any considered by a European government this year, amounting to roughly 10% of U.S. annual economic output, though the package includes items such as healthcare spending and unemployment benefits that are considered normal spending by most European governments.
Economists say the outlook for fiscal policy across the world depends on the course of the pandemic. New variants of the virus are cropping up, pushing up caseloads and prompting governments to tighten restrictions. Evidence of vaccines’ effectiveness against new versions of a pathogen that has already claimed at least 2.6 million lives globally is mixed.
“If the recovery is delayed, for example because of new waves of infections, this means that support will need to be maintained for longer than expected, and fiscal deficits will become larger,” said Alfred Kammer, director of the European department at the International Monetary Fund.
The European Union last year suspended its budgetary rules that seek to limit deficits for 2020 and 2021 to clear the way for higher spending by member states. It has yet to decide whether to extend that suspension into 2022, though the European Commission, the bloc’s executive arm, signaled Wednesday it was likely to do so on the grounds the region’s economy isn’t likely to return to its precrisis size until the middle of next year.
Mr. Sunak’s decision to raise the tax rate charged on corporate profits in Britain marks a departure from the government’s approach to lowering its debts after the global financial crisis, which focused on cutting spending.
That 19% rate is the lowest in the Group of Seven advanced economies. The corporate tax rate in the U.S. is 26%, according to the Organization for Economic Cooperation and Development. In France it is 32% and in Germany and Japan, just under 30%.
“Over the last 15 years, corporate income-tax rates went in only one direction,“ said Craig Hillier, leader for international tax services at Ernst & Young Americas. ”Are we at a point where governments are reconsidering that in light of the pandemic and fiscal pressures? There probably is a reflection on rates.”
President Biden also wants an increase in the corporate tax rate as a way of recouping some of the costs of supporting the economy through the pandemic, although it isn’t clear that Congress will back that move.
—Anna Hirtenstein contributed to this article.
Write to Jason Douglas at [email protected] and Paul Hannon at [email protected]
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