The Institute for Fiscal Studies (IFS) has issued a stark warning in its annual Green Budget report, wherein it cautioned against any cuts in taxes or increases in spending preceding the elections, arguing that the UK finds itself in a severe fiscal predicament.
The report brought attention to the potential repercussions of poorly timed pre-election tax cuts, highlighting that these could turn out unfeasible, in light of the significant increase in the tax burden lately. According to their calculations, the Prime Minister’s decision to stagnant tax thresholds for six years equates to an implicit tax rise worth £52bn annually by 2028.
In fact, rampant inflation rates since the declaration of this policy have escalated the original £8bn annual revenue projection for 2026. Consequently, the institute reiterated its apprehension that pre-election tax cuts could result in “unsustainable” policy decisions and could inadvertently prolong a recession due to surging interest rates. The ensuing general elections are scheduled to be held latest by January 2025.
Paul Johnson, IFS Director, expresses this precarious financial situation by stating, “We are in a horrible fiscal bind. With taxes at record highs and government revenues anticipated to surpass non-interest spending for the first time in a generation, one would presume sufficient cushion for tax cuts or spending enhancements.”
Nevertheless, he points out that dismal growth, coupled with high debt interest spending over the ensuing years, has rendered the national debt to remain stuck at almost 100% of national income. Johnson warns of a protracted period of high taxation and stringent spending, reflecting the impact of tight spending settlements and forthcoming big tax hikes.
The institute further cites an anticipated rise in government borrowing costs due to higher-than-expected interest rates. The economic growth forecast also paints a grim picture, predicting either a sluggish growth or a potential minor recession shortly. These issues add complexity against a backdrop of substantial long-term pressures on public finances stemming from social care to the NHS budget outlays.
It is estimated by the IFS that the government’s newly announced NHS workforce plan alone could cost the exchequer a hefty £50bn annually in the long term. The government’s official forecasts, expected to be unveiled next month alongside the Autumn Statement, will be crucial in shaping the fiscal policy actions.
Chancellor Jeremy Hunt, acknowledging the ongoing economic uncertainty fueled by the sustained controversy over Russia’s invasion of Ukraine, advocated for fiscal prudence and adapting to market volatilities.
Meanwhile, election race intensifies as former PM Liz Truss is gearing up to unveil her self-proclaimed “Growth Budget” ahead of the Autumn Statement. Simultaneously, the Labour Party, banking on a more expansionary policy stance, proposes a hefty £20bn additional spending by the conclusion of the next Parliament, conditional upon their electoral victory.
