ALMOST three million people could be unemployed by the start of next year, a leading think-tank has warned.

The Institute for Fiscal Studies (IFS) has also warned the Chancellor will have to raise taxes by more than £40 billion a year to prevent Government debt spiralling out of control.

In its Green Budget report published today, the IFS said unemployment could reach the highest level since the 1990s, with 700,000 jobs lost already despite the furlough scheme having not yet ended.

As many as 2.9m could be unemployed by the first quarter of 2021 across the UK – which equates to around 290,000 people in Scotland out of work.

On top of rising unemployment rates, Government borrowing is set to reach its highest level ever during peacetime.

However with the economy now hit by the increasing lockdowns, the IFS said the Government’s declining tax revenues could easily go above £200bn.

Aside from Covid, the report states Brexit will also make balancing the books more difficult, with the economy growing by around 2 per cent less next year than if the country was part of the EU single Market.

Experts at the think-tank have said it would be “unwise” for the Chancellor to consider raising taxes right now, but warned that large rises will be needed in the middle of the next decade to balance the books.

The warning came after Rishi Sunak said last week in his speech to the virtual Conservative Party conference that the Government had a “sacred responsibility” to future generations to rebuild the public finances.

The report said the Government had already increased spending on day-to-day public services by £70bn in response to the pandemic.

Even if three-quarters of that was to stop this year, it would still add £20bn to public sector borrowing by 2024-25.

At the same time, the IFS said under its “central scenario” the economy would be 5% smaller in 2024 than was projected at the start of the outbreak in March.

Paul Johnson, IFS director and an editor of the Green Budget, said: “This Government has chosen to pump an additional £200 billion into the economy to support jobs, businesses and incomes this year.

“That is a level of fiscal support unprecedented in peace time. For now, with borrowing costs extremely low, Mr Sunak shouldn’t worry unduly about the debt being accrued as a result. It is necessary.

“Well-directed investment spending over the coming period could help with growth and hence, eventually, the fiscal numbers.”

He added that  while the measures could help, it would not be enough to “fully protect the economy in the medium-run”.

He said: “We are heading for a significantly smaller economy than expected pre-Covid, and probably higher spending too.

“Without action, debt – already at its highest level in more than half a century – would carry on rising.

Tax rises, and big ones, look all but inevitable, though likely not until the middle years of this decade.

“So far, the challenge to the public finances has been eased by historically low interest rates. But this is also a vulnerability: successive rounds of quantitative easing mean debt interest spending will rise sharply and suddenly with any increase to the Bank Rate. In these circumstances any weakening of the independence of either the Bank of England or the Office for Budget Responsibility could be disastrous, as could any sense that the Government did not have the health and stability of the economy and public finances at the centre of its concerns.

“Locking in more Government borrowing on a long-term, inflation-linked basis would ensure that the real cost of a greater share of Government debt was locked at current low levels and would provide a signal the Government would not be tempted to try to inflate away debt.”

SNP MP Alison Thewliss said the think-tank was right about tax rises.

She said: “The IFS is right – now is not the time for tax increases or austerity.We are in the middle of a global health pandemic and on a Brexit cliff-edge. The priority for the next

18 months must be to support the economy, prevent soaring unemployment and protect people’s incomes – irrespective of short-term impacts on borrowing. That includes extending the furlough scheme and supporting growth by devolving financial powers to Holyrood and introducing the £80bn emergency fiscal plan the SNP has been demanding for months.

“If the Government continues to withhold these crucial funds and powers, which other countries are already utilising, Scotland’s recovery will be put at risk – threatening more job losses and budget cuts, and devastating our economy.”

The report said that while every major economy apart from China had seen GDP shrink in the first part of the year, the UK along with Spain had suffered the biggest fall, with a 20% drop – double that of the United States or Germany.

The amount of money being spent on Universal Credit claims is around 7% of the national income, and the highest it has been since records began.

The number of families claiming the payments has increased, according to the report, from 2.6 million in February 2020 to 4.2million just three months later, in May.

The report stated: “Claimants are receiving higher entitlements than they were before – due to both the changes in their circumstances and the temporary increase in generosity of working-age benefits.

“Consequently, spending on working-age benefits is now forecast to be 7% of national income in 2020–21.

“This is 2% of national income higher than it was last year and the highest it has been since records began in 1978–79.”

Payroll data suggested that 700,000 employee jobs had already been lost, even before the initial furlough scheme ends at the end of this month.

The report said the unemployment rate was now likely to increase to around 8–8.5% – between 2.7–2.9 million people – in the first half of 2021.