Labour and Tories need to be honest about economic trade-offs, says IFS | Economic policy

Economic policy

Thinktank calls on parties to ‘level’ with voters about difficult tax and spending decisions before next election

Thu 25 Jan 2024 06.00 CET

Britain’s next government faces some of the toughest tax and spending choices for generations as it is forced to grapple with the impact of weak growth and high debt interest payments, a leading thinktank has said.

The Institute for Fiscal Studies (IFS) warned that Jeremy Hunt’s much-predicted budget tax cuts risked being reversed or paid for by spending cuts, and urged the Conservative and Labour parties to “level” with voters before polling day.

Launching the IFS’s work programme for an expected autumn general election, the thinktank said the victorious party would have a “thorny” inheritance.

“Living standards have endured an unprecedentedly long stagnation. Taxes are at record levels for the UK (though remain low to middling by European standards). Public services are showing visible signs of strain and are, in many cases, performing less well than they were in 2010,” the report said.

Falling inflation and lower market interest rates have improved the short-term outlook for the public finances and provided Hunt with the scope for a giveaway package worth around £20bn. But the IFS said the chancellor needed to spell out what taxes would rise in the future or specify which services currently supplied by the state would be axed.

“Further tax rises and further cuts for most public services are built into current plans. But on official forecasts, this is only just enough to stabilise government debt as a fraction of national income,” the report said.

The thinktank said the challenges facing the next government were made more acute because a slow-growing economy would generate less in tax, and interest payments on the UK’s £2.7tn national debt would account for 9% of revenues on average across the next parliament.

Both the Conservatives and Labour have promised to reduce debt as a share of national income – which stands at just under 98% – but the IFS said this would be more difficult than at any time since the 1950s and would involve trade-offs. These included:

  • A large cut to public investment over the rest of the decade, which would still fall even if Labour’s planned spending on its green prosperity plan was taken into account.

  • Tough funding constraints, with concentration of spending on priority areas such as the NHS, schools and defence, implying cuts of £20bn in other unprotected departments.

  • Plans by both parties to cut net migration to the UK had implications for the social care and higher education sectors, and neither party had talked about the higher care costs or the higher tuition fees for domestic students that would result from cutting numbers.

  • Progress towards achieving net zero had involved picking most of the low-hanging fruit and the next steps – such as reducing emissions from buildings – would involve short-term costs on businesses and consumers.

  • Spending on disability benefits was rising fast and required urgent attention, but previous efforts to rein in spending had struggled to achieve the stated objectives, while any general promises to cut spending would need to be accompanied by specific details as to who would lose out.

The IFS said that unlike wars and pandemics, the challenges facing an incoming government were predictable, but could not be dealt with by a government that ignored reality and the need to choose from competing options.

The thinktank’s 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.”

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