By Mark McSherry
The next UK government is likely to face “some of the most difficult economic and fiscal choices the UK has faced outside of pandemics, conflicts and financial crises” according to a new report from UK’s Institute for Fiscal Studies (IFS).
“These challenges are entirely predictable,” said the IFS. “Those seeking our votes should level with the electorate about how they will confront them.”
The report said a combination of high interest payments on the UK government’s elevated £2.685 trillion of debt and low expected growth is forecast to make it more difficult to reduce debt as a fraction of national income than in any parliament since at least the 1950s.
“Doing so – as both main parties have committed under their fiscal rules – looks set to require substantial primary surpluses: that is, to get debt down, government will need to raise more in tax and other revenues than it spends on everything other than debt interest,” said the IFS.
“The country has not achieved that for more than 20 years.
“A new government will inherit taxes at record levels for the UK (though still low-to-middling by European standards); living standards that have endured a record-long stagnation; and public services – health, local government, prisons, the justice system – that are visibly struggling, and performing less well than they were back in 2010.
“Yet current spending plans imply further cuts for most public services other than health.
“The parties must be honest with the public about the tough trade-offs they will inevitably have to make on tax and spending.”
Earlier this week, the UK’s Office for National Statistics (ONS) said UK central government borrowing in the financial year-to-December 2023 was £119.1 billion, £11.1 billion more than in the same nine-month period the previous year and the fourth-highest financial year-to-December borrowing on record.
The UK’s borrowing is forecast to reach £123.9 billion by the end of the financial year.
The ONS said the UK’s public sector net debt excluding public sector banks was £2.685 trillion at the end of December 2023 and was provisionally estimated at around 97.7% of the UK’s annual gross domestic product (GDP). This is 1.9 percentage points higher than in December 2022 and remains at levels last seen in the early 1960s.
Starting the IFS’s programme of UK general election work, funded by the Abrdn Financial Fairness Trust and the Nuffield Foundation, IFS director Paul Johnson said: “Now more than ever, as a country, we face some big decisions and trade-offs over what we want the state to do and how we’re going to pay for it.
“Those looking to form the next government should be honest about these trade-offs.
“If they are promising tax cuts, let’s hear where the spending cuts will fall. If they are going to raise, or even protect, spending, they should tell us where taxes will rise.
“Or parties might think that further increases in government debt are justified: in which case they should make the argument for why debt should be rising.
“If to govern is to choose, then to campaign should be to present clear choices and trade-offs to the electorate. If the parties don’t do that clearly and honestly over the next year, we at IFS will do what we can to plug that gap.”
The IFS report said: “Everything is harder when the economy is growing slowly, when the public finances are constrained by elevated debt and debt interest spending, when taxes have already been increased sharply, and when many public services are struggling.”
The IFS report gives details of some of the difficult trade-offs the next UK government will have to face.
“We spend £153 billion a year on benefits for pensioners and £124 billion on benefits for children and people of working age,” said the report.
“For politicians looking to cut taxes or increase spending elsewhere, this can look like a tempting place to go in search of savings.
“But the generosity of many benefits has already been cut, and to do more could cause more serious hardship.
“Spending on disability benefits is rising incredibly fast as claimant numbers soar.
“This needs urgent attention, but previous efforts to rein in spending have struggled to achieve their objectives. Again, any general promises to cut spending should be accompanied by specific details as to who would lose out …
“Net immigration is at record levels, and both major parties have pledged to bring it down. But neither party has promised the additional support to the social care system that would almost certainly be required if numbers of foreign care workers were to be cut substantially.
“And neither has proposed higher fees for domestic students to make up for any loss of foreign students, on whom the sector is very dependent.”
Abrdn Financial Fairness Trust CEO Mubin Haq said: “With the next election imminent, there’s a danger that politicians paint themselves into a corner by failing to confront difficult trade-offs.
“They therefore risk being unable to fund existing public services or invest in new provision to kickstart our ailing economy.
“Fiscal constraints make these commitments tricky but not impossible. With the public firmly behind the need for greater investment, it should be possible to be honest about the need to increase revenues to pay for it.
“Failure to do so risks our living standards continuing to stagnate.”
Nuffield Foundation Director of Welfare Mark Franks said: “Given the daunting economic and fiscal outlook, the next government will rightly look to improve the growth of the economy to make the difficult trade-offs it faces less acute.
“But, even if growth surpasses expectations, the government will still have to grapple with very difficult economic and fiscal choices.
“Additionally, recent years have underscored the ever-present threat of adverse economic shocks, which would make the trade-offs even more stark. Cutting investment spending would only worsen this economic bind in the long term.”