Chancellor Rishi Sunak is expected to delay plans for tax rises in his March budget as the coronavirus pandemic continues to wreak havoc on the UK economy.
Sunak has already warned that the UK is facing huge levels of debt thanks to the health crisis and it could become unaffordable if interest rates suddenly rose.
The government is likely to borrow £370bn ($501bn) this year, more than double the £158bn deficit in the peak year of the financial crisis.
A senior government source told the Times that it was the “wrong time” for tax rises and that they were likely to be shelved until the autumn at the earliest.
“We’ll be in the midst of a recession and living under severe lockdown restrictions,” the source said. “The mutant strain of the virus has changed our entire perspective on this. It’s too soon.”
The new variant of COVID-19, which is thought to be between 50-70% more transmissible, sent the UK into its third nationwide lockdown.
Vast swathes of the UK economy now face at least seven weeks of severely limited trade, with many firms forced to shut up shop altogether. Cabinet minister Michael Gove said on Tuesday the restrictions could last into March.
Earlier this week Sunak announced £4bn in new grants to support retail, hospitality and leisure firms, and another £594m for struggling firms in other sectors.
The chancellor said firms forced to close would receive one-off grants worth up to £9,000 per site, in a move welcomed by business leaders. Other hard-hit firms will be able to apply for a funding pot from local authorities.
The package overall is expected to support more than 600,000 firms, and is provided on a per-property basis.
Investors are also betting that the Bank of England (BoE) is likely to cut the UK’s interest rate.
Markets are now pricing in a 50% chance of an interest rate cut this year, stockbroker AJ Bell (AJB.L) said, up from just 30% last week.
The Bank of England cut interest rates to a record low of 0.1% last year to cushion the initial economic blow from the COVID-19 pandemic. The central bank has resisted cutting rates further but said it is preparing the groundwork for negative interest rates.
British banks are scrambling to prepare for negative interest rates, with senior leaders warning it could take up to 18 months to ready systems. Executives at British banks told MPs in November they were not yet ready for negative rates despite the Bank of England suggesting it could deploy them in early 2021.
The next Bank of England policy meeting is at the beginning of February. Laith Khalaf, a financial analyst at AJ Bell, said Monetary Policy Committee members would “have time to take a deep breath and see how the next few weeks go.”
Watch: Rishi Sunak outlines new financial support measures