Ending austerity could push UK tax to highest since 1940s - IFS

By David Milliken

LONDON (Reuters) - British taxes would need to rise to their highest since just after World War Two to sustainably meet Prime Minister Theresa May's goal of ending the austerity squeeze on public services, a think tank said ahead of her government's annual budget.

The Institute for Fiscal Studies (IFS) said higher taxes need not hurt the economy but May's fragile hold on power, as she attempts to navigate Brexit, made significant increases unlikely in the Oct. 29 budget statement.

Instead, efforts to lighten Britain's debt burden were the likeliest casualty of May's promise to end austerity, potentially leaving the country vulnerable when the next economic crisis hits.

"Increasing borrowing is clearly the line of least resistance," IFS director Paul Johnson said. "It's going to be very hard, for all sorts of very obvious reasons, for anything very substantial in terms of tax rises in the short run."

Last year, finance minister Philip Hammond backed down on planned tax rises for the self-employed which angered Conservative lawmakers.

May's minority government now relies on Northern Ireland's Democratic Unionist Party which has threatened to vote against the budget if London does not heed its Brexit concerns.

"At a point where you don't have a parliamentary majority, the public finances don't tend to be looked after in such a conservative way as they might otherwise," Johnson said.

Weak economic growth made deficit reduction much slower than the Conservatives expected when they took office in 2010.

Hammond has said he aims to run a balanced budget by the mid-2020s.

At 1.9 percent of gross domestic product, the budget deficit last year was the lowest since the 2001/02 financial year.

But public debt more than doubled as a share of GDP after the financial crisis to above 80 percent, and has only recently started to fall.

May did not specify what she meant when she told her Conservative Party's annual conference that austerity "is over" on Oct. 3.

The non-partisan IFS said even a narrow interpretation of no more real-terms cuts for public services but a continued welfare squeeze would leave a 19 billion-pound hole in Hammond's budget plans.

Filling the hole via tax rises would need tax as a share of GDP to rise by 1 percentage point to 35 percent of GDP.

"Doing that would mean having a tax burden that we haven't had for a sustained period since the late 1940s," IFS deputy director Carl Emmerson said.

However, this would still leave British taxation mid-table by international standards -- above the United States and Japan but more than 10 percentage points below France and Denmark.

(Editing by William Schomberg)