Whoever wins next UK election will face budget bind -IFS think-tank

By William Schomberg

LONDON (Reuters) – Britain’s public finances are so constrained that whoever governs in the years ahead – the ruling Conservatives or the Labour Party – will have little room to cut taxes or boost spending, a report by a leading think-tank showed on Tuesday.

The Institute for Fiscal Studies warned that giving voters a tax cut before an election expected in 2024 would risk causing a “short-term economic sugar rush”, higher Bank of England interest rates and a protracted recession.

Further ahead, weak economic growth, high debt levels and growing demands on public spending from health to defence – problems Britain shares with many other rich countries – would probably maintain the tight bind on the next government.

“The price of our high levels of indebtedness, failure to stimulate growth and high borrowing costs is likely to be a protracted period of high taxes and tight spending,” IFS director Paul Johnson said.

Britain’s economy was struggling to grow even before the double whammy of the COVID-19 pandemic and the surge in energy prices, both of which triggered a wave of government borrowing.

Finance minister Jeremy Hunt has ruled out significant tax cuts in his Nov. 22 budget update, despite pressure from lawmakers in his Conservative Party who are alarmed at Labour’s big lead in opinion polls.

Hunt said last week the government’s debt interest bill could be as much as 30 billion pounds ($36.5 billion) higher, due to high inflation and interest rates.

Labour’s would-be finance minister Rachel Reeves has stressed she would follow a similar fiscal target to Hunt: reducing debt as a share of the economy – which has trebled over the past 20 years to about 100% – while also promising to accelerate Britain’s weak growth rate.

The IFS’s Johnson said Labour had so far announced plans for only small, targeted tax increases which raised questions about its ability to fund investment that could boost economic growth.

Britain’s current government is on course to have increased taxes by more than any other since the Second World War, according to the IFS.

The think-tank said Hunt’s decision to freeze the thresholds at which people start paying higher rates of income tax would mean 16% of taxpayers are paying those higher rates in five years’ time, up from just 4% at the start of the 1990s.

The freezing of income tax thresholds would lead to a 52 billion-pound annual tax increase by 2027/28 which the government is likely to struggle to keep in place, the IFS said.

Carl Emmerson, deputy director at the IFS, said the combination of growing pressures on the public finances from welfare, demand for more public services, slow economic growth and high debt meant only one thing.

“That just points to you having to have a higher tax burden over the medium term,” Emmerson said.

Forecasts by U.S. bank Citi, which contributed to the IFS report, showed Britain was running further behind its pre-COVID economic growth trend than other European countries.

The International Monetary Fund said last week that Britain’s economy would be the slowest among Group of Seven economies in 2024.

But Emmerson said longer-term challenges relating to an ageing population were less severe in Britain than in other comparable countries.

($1 = 0.8224 pounds)

(Writing by William Schomberg; Editing by Christina Fincher)