Raising taxes or imposing a public sector wage freeze are among the options on the table to pay for a government borrowing boom during the coronavirus pandemic, according to a leaked Treasury document. The internal report estimated Britain’s budget deficit – the gap between government income and expenditure – is on course to hit £337bn this year after a dramatic increase in public spending to cushion the economic fallout from the disease, while tax income has been eviscerated by lockdown measures. In the document outlining the potential costs for the public purse, revealed by the Daily Telegraph, Treasury advisers outlined a package of potential policy measures for the chancellor, Rishi Sunak, to consider. The internal predictions for a deficit this year of £337bn are roughly in line with estimates made by the Treasury’s independent economics forecaster, the Office for Budget Responsibility, which had pencilled in borrowing of £273bn this year. The deficit had been expected to be about £55bn this year, before the pandemic struck. Sunak has previously warned the impact to the public purse is expected to be significant. The government has so far refused to give more detail into the costs of its support schemes or how it intends to pay for them. However, ministers are focusing on responding to the crisis first before setting out a budget plan later in the year. Among the options Sunak could consider are: Austerity The most controversial option would be to relaunch an austerity drive by cutting government spending. According to the Telegraph, the Treasury report suggests a two-year public sector pay freeze could generate savings of £6.5bn by 2023-24. The architect of the Conservatives’ austerity policies used after the financial crisis, the former chancellor George Osborne, has argued for a new era of belt-tightening after the Covid-19 outbreak. However, such an approach is considered politically toxic given the damage to public services under Osborne. With members of the public gathering every Thursday night to applaud the NHS, care workers and other public sector staff at the centre of the pandemic, it would take a bold Tory chancellor to make a case for real-wage cuts and reduced funding levels. After Boris Johnson set a course at the December election to gradually reverse the cuts, government spending as a proportion of national output was set to jump to the highest levels since the 1970s before Covid-19 struck. But after years of cuts, many areas remain underfunded. Tax rises Unpopular particularly among Tories, tax rises have been suggested by thinktanks as the solution for tackling the budget deficit, including economists at the Institute for Fiscal Studies and the National Institute of Economic and Social Research. The Treasury document suggests a wide-ranging approach that would include breaking the Tory’s “triple tax lock” promise not to raise income tax, national insurance or VAT, which was made before the election. According to the report, raising significant amounts would require “broad-based” changes, meaning they would apply to all income brackets, including to income tax, VAT, corporation tax and national insurance. It said a 1% rise in the basic rate of income tax, to 21%, would raise about £5bn per year. The pensions triple lock – which guarantees annual increases in the state pension in-line by whichever is highest from average earnings, inflation or 2.5% – could also be scrapped, saving £8bn per year. Potentially helping to share the cost of the crisis between the old and young, the idea has been floated by the Social Market Foundation. Sunak has dropped a heavy hint that taxes on the self-employed could rise as the country comes out of crisis mode. Speaking of the lower rates of tax that are open to self-employed workers, in light of the support scheme made available to those who work for themselves, he said in March: “It is much harder to justify the inconsistent contributions of people with different employment statuses. If we all want to benefit equally from state support, we must all pay in equally.” Growth The chancellor has suggested he would prefer to grow the economy as the primary means of cutting the deficit. Budget deficits are influenced by two factors: government spending and tax income. At present, tax income has slumped because the economy has been broadly at a standstill. Rebooting activity and encouraging faster growth could help raise more taxes, reducing the deficit. The challenge from this approach will be how quickly business activity can resume without spreading the virus. The growth rate could also be constrained by the deep damage from business failures and job losses, although the scale of the government support packages is designed to cushion this blow. Speaking at a Downing Street briefing last month, Sunak said a return to austerity would not be appropriate, and that the government’s “levelling-up” agenda would take priority. “Indeed I believe this can still be a critical part of how we get back to normal here,” he said. He added: “Obviously this has cost a lot … but the best way out of this for all of us is to just grow the economy.” Borrowing Britain is not alone in heading for a monumental increase in public borrowing as the pandemic spreads. The US Treasury has reported a record $738bn (£599.2bn) deficit for the month of April, while other countries are also rapidly adding to their outstanding debts. The Treasury report warned the UK could face a sovereign debt crisis – where government borrowing costs become ruinously expensive – unless the economy recovers quickly, in an echo of the warnings Osborne made during the 2008 financial crisis. But as one of the biggest economies in the world and as other countries also struggle, economists believe the UK has little trouble in attracting domestic and international buyers of government bonds – sold to accommodate increases in borrowing. The Bank of England is also purchasing vast quantities of government debt through its quantitative easing programme. Interest rates on government borrowing are at a historic lows, making it cheaper to finance public spending. The value of the nation’s debts could also be reduced over time as inflation rises.