The next UK government will face one of the toughest fiscal challenges since the 1950s, with sluggish economic growth and high national debt, according to a report by the Institute for Fiscal Studies
The next UK government could be facing the steepest debt challenge since the 1950s due to slow economic growth and high national debt, experts have warned.
This bleak forecast means the winning party of this year’s election might struggle to fund public services unless there’s clear communication about the decisions that need to be made, according to a report by the Institute for Fiscal Studies (IFS). Prime Minister Rishi Sunak and Chancellor Jeremy Hunt have hinted at tax cuts in the upcoming spring Budget in March.
However, the IFS suggests these cuts, although appealing during an election year, might lead to higher taxes in the future or reduced public spending. Both the Labour and Conservative parties have pledged to reduce the country’s debt relative to its income, but this will prove especially difficult due to high debt interest payments and low anticipated growth.
“On one measure, it will be more difficult to reduce the debt-to-GDP ratio over the next parliament than in any other parliament since the 1950s,” the report states. Back in the 1950s, the country experienced a debt-to-GDP ratio of around 200% – approximately double what it is today – thanks to soaring public debt during World War II.
The new government will inherit record high taxes, stagnant living standards and struggling public services, according to a report. It also suggests that the Government’s spending plans indicate further cuts in areas other than health.
The Institute for Fiscal Studies (IFS) warns that under reasonable assumptions for day-to-day spending on the NHS, schools, defence, international aid and childcare, the UK is heading towards a £20 billion reduction in funding for other services. The report states that without extra money, it will be impossible to increase spending on preventative services without making cuts elsewhere.
It will also be harder to pursue “desperately needed” tax reform without creating losers. Ahead of the spring Budget and the expected election later this year, the IFS issued a stark warning: “These challenges unlike a conflict, pandemic or financial crisis are entirely predictable.” It added: “None can be meaningfully confronted by a government that wilfully ignores reality and the need to choose between difficult competing options.”
The IFS warned against ‘cakeism’ – trying to have the government’s fiscal cake and eat it too. It said any party serious about governing after the election should resist this urge, as the electorate deserves better. Paul Johnson, director of the IFS, urged those looking to form the next government to be “honest about these trade-offs”.
He added: “if they are promising tax cuts, let’s hear where the spending cuts will fall” Mubin Haq, the boss of abrdn Financial Fairness Trust which funded the study with the Nuffield Foundation shared a warning: “With the next election imminent, there’s a danger that politicians paint themselves into a corner by failing to confront difficult trade-offs.”
Mr Haq added: “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.” Also speaking on the matter was Mark Franks, director of welfare at the Nuffield Foundation.
He pointed out that “cutting investment spending would only worsen this economic bind in the long term”. The government, however, assured that their plans were sound.
A spokesperson for the Treasury laid out their thinking, saying: “Our decisive action to halve inflation and ensure debt falls as a share of the economy means we are now beginning to turn a corner, which is why we can afford tax cuts for 27 million working people this month. The best way to deliver sustainable funding for public services in the future is to grow the economy the UK has grown faster than France, Germany and Japan since 2010 and the OBR say our action in spring and autumn will deliver the largest boost on record.”
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