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Britain’s Public Finances Constrained: Little Room for Tax Cuts or Spending Boost, Warns Think-Tank

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Britain’s public finances are severely constrained, leaving little room for tax cuts or increased spending for the next government, whether it be the ruling Conservatives or the Labour Party, according to a report from the Institute for Fiscal Studies (IFS). The think-tank warned that giving voters a tax cut before the expected 2024 election could result in a short-term economic boost followed by higher interest rates and a prolonged recession.

The IFS highlighted that weak economic growth, high levels of debt, and increasing demands on public spending in areas such as healthcare and defense would likely continue to restrict the next government’s ability to make significant changes. Paul Johnson, the director of the IFS, stated that the consequences of the country’s high debt, lack of growth stimulation, and high borrowing costs would likely lead to a prolonged period of high taxes and tight spending.

Even before the impact of the Covid-19 pandemic and the recent surge in energy prices, the UK’s economy was already struggling to grow, leading to increased government borrowing. Despite pressure from Conservative lawmakers concerned about Labour’s lead in opinion polls, Finance Minister Jeremy Hunt has ruled out significant tax cuts in his upcoming budget update on November 22. Hunt warned that high inflation and interest rates could result in a debt interest bill up to £30 billion higher than expected.

Labour’s potential finance minister, Rachel Reeves, has emphasized her commitment to reducing debt as a share of the economy, which has tripled over the past 20 years to around 100%, while also aiming to accelerate the country’s weak growth rate. However, the IFS questioned Labour’s ability to fund investments that could boost economic growth, as they have only announced plans for small, targeted tax increases.

According to the IFS, the current government is on track to have increased taxes more than any other since World War II. The freezing of income tax thresholds means that by 2027/28, 16% of taxpayers will be paying higher rates, compared to just 4% in the early 1990s. This freezing of thresholds will result in an annual tax increase of £52 billion by 2027/28, which the government may struggle to maintain, according to the IFS.

Carl Emmerson, the deputy director at the IFS, explained that the combination of growing pressures on public finances, including welfare, demand for public services, slow economic growth, and high debt levels, would ultimately lead to a higher tax burden over the medium term.

The report provides a sobering analysis of the challenges facing the UK’s public finances, highlighting the limited options available to the next government. With both major parties cautiously approaching tax cuts and increased spending plans, it is clear that the country’s economic recovery will require careful management and strategic decisions to tackle the existing constraints.

More detail via The Straits Times here… ( Image via The Straits Times )

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