The IFS urges Rishi Sunak to hold his ground for now but warns big tax rises must come if a new era of austerity is to be avoided.

Taxes may have to rise by £40bn - just to prevent government borrowing "spiralling upwards", according to the Institute for Fiscal Studies (IFS).

The think-tank's so-called green budget, a survey of the UK economy and public finances, warns that weaker tax revenues as a result of the COVID-19 crisis will combine with record levels of peacetime borrowing to place a huge strain on the Treasury in the years ahead.

The IFS study pointed to a central scenario that the public purse faced a revenue shortfall of at least £100bn in four years' time because the economy is on course to be 5% smaller than its pre-crisis level.

"Even a government content to keep debt constant at 100% of national income, and borrowing at around £80bn a year, would, under our central scenario, require a fiscal tightening (tax rise and/or spending cuts) worth around 2% of national income in 2024 - over £40bn in today's terms," the report said.

The figures, the IFS cautioned, did not account for any additional spending likely to still be needed at that time that would ramp up pressure to borrow.Advertisement

The report warned that now was not the time for the chancellor, who has already called off his autumn budget, to be considering tax increases given the extent of the damage to employment and wider Treasury income.

Rishi Sunak said last week that the government had a "sacred responsibility" to future generations to rebuild the public finances.