Britain's fragile public finances will cast a pall over the general election campaign, with both Rishi Sunak and Sir Keir Starmer warning of looming fiscal challenges by a leading economic think tank.
The Institute for Fiscal Studies (IFS) warns that the economy faces the “worst of both worlds” – lower GDP growth and higher spending on debt interest due to interest rates reaching their highest level in 16 years.
According to the Institute of International Finance, growth is unlikely to return to healthier trends in the next parliament, with government spending on debt repayment expected to remain high. This situation would limit the financial flexibility of any new chancellor after the general election scheduled for July 4.
Paul Johnson, director of the IFS, noted that both Starmer and Sunak have promising ideas to stimulate growth but must also deal with the difficult economic and financial environment. “When growth is high and interest rates are relatively low, the government can pursue a more flexible fiscal policy – it can borrow more – without pushing debt onto an upward path,” the research center explained. Unfortunately, the conditions for high growth and low debt interest payments are not expected to be achieved in the next parliament.
The UK's debt-to-GDP ratio has risen to nearly 100% from around 65% in 2010, driven by borrowing to cover the costs of the Covid pandemic and rising energy prices after the Russian invasion of Ukraine. Taxes as a share of GDP are also expected to reach their highest levels after World War II. Interest rates rose to 5.25%, and although inflation fell to 2.3% from 11.1%, increased spending on debt interest diverts resources from other public services.
The Institute for Fiscal Studies warns that Labor and the Conservatives will face tough fiscal constraints on their first day in power, having broadly adhered to current fiscal rules that aim to reduce the debt-to-GDP ratio within five years and cap annual borrowing at 3%. Of the gross domestic product. gross domestic product. Jeremy Hunt, the current Chancellor of the Exchequer, has cut National Insurance contributions by four percentage points over the past two fiscal events, yet the Office for Budget Responsibility estimates only £8.9 billion is “up” against fiscal targets after the March Budget, a significant fall from the average. £27 billion since 2010.
National Insurance cuts have been partly funded by significant real-term budget cuts to unprotected government departments, including local councils and courts. However, the details of which departmental budgets will bear these cuts remain unclear, leading to criticism from the IFS for a lack of transparency. “We can decide, as a country, to charge for free services, test the resources that are provided globally, or for the country to stop doing the things it is doing,” the IFS noted. They highlighted the inconsistency in allowing parties to promise to reduce spending without providing details of where the cuts would be made.
The looming budget pressure could lead to real cuts of between 1.9% and 3.5% per year, equating to cuts of between £10bn and £20bn. The Decision Foundation, another economic think tank, called these planned cuts a “fiscal fantasy.”
The comprehensive spending review is expected to be one of the first major economic measures taken by either Labor or the Conservatives after the election.