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Think-tank Report Warns UK’s Next Government Faces Constraints on Taxes and Spending

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UK Public Finances Constrained, Report Warns

Britain’s public finances are in such a tight position that neither the ruling Conservatives nor the Labour Party will have much room to cut taxes or increase spending in the coming years, according to a report by the Institute for Fiscal Studies (IFS). The think-tank cautioned that providing voters with a tax cut before the expected 2024 election could result in a “short-term economic sugar rush,” higher interest rates from the Bank of England, and a prolonged recession.

The IFS report highlighted various challenges that the next government will face, including weak economic growth, high levels of debt, and growing demands on public spending in areas such as health and defense. These issues are not unique to Britain but are shared by many other wealthy nations, which means that the next government is likely to be constrained in its fiscal decisions.

Paul Johnson, the director of the IFS, stated, “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.”

Even before the impact of the COVID-19 pandemic and the surge in energy prices, Britain’s economy was already struggling to grow. The resulting increase in government borrowing has further exacerbated the challenges faced by the country.

Despite pressure from members of his own Conservative Party, Finance Minister Jeremy Hunt has ruled out significant tax cuts in his upcoming budget update on November 22. Hunt cited concerns over high inflation and interest rates, which could potentially increase the government’s debt interest bill by as much as £30 billion ($36.5 billion).

Labour’s prospective finance minister, Rachel Reeves, has indicated that she would adopt a similar fiscal target to Hunt, aiming to reduce the country’s debt as a percentage of GDP. However, she also emphasized the need to accelerate Britain’s weak growth rate.

The IFS noted that Labour has thus far only proposed small, targeted tax increases, raising questions about its ability to fund investment that could stimulate economic growth.

According to the IFS, the current UK government is on track to implement more tax increases than any other government since World War II. The think-tank highlighted that freezing the thresholds at which individuals begin paying higher rates of income tax would result in 16% of taxpayers being subjected to these higher rates in five years’ time, compared to just 4% in the early 1990s.

This freezing of income tax thresholds would lead to an annual tax increase of £52 billion by 2027/28, which the government may struggle to maintain, the IFS warned.

Carl Emmerson, deputy director at the IFS, emphasized that the combination of mounting pressures on public finances from welfare demands, the need for increased public services, sluggish economic growth, and high levels of debt leaves only one option: a higher tax burden over the medium term.

Forecasts from US bank Citi, which contributed to the IFS report, indicated that Britain is falling further behind its pre-COVID economic growth trend compared to other European countries.

Last week, the International Monetary Fund (IMF) projected that Britain’s economy would be the slowest-growing among the Group of Seven (G7) nations by 2024.

However, Emmerson noted that, compared to other comparable countries, Britain faces less severe long-term challenges related to an aging population.

Overall, the IFS report paints a challenging fiscal landscape for the next UK government, with limited scope for tax cuts or increased spending. As the country navigates its recovery from the COVID-19 pandemic, policymakers will need to carefully balance economic growth, public spending, and tax burdens to ensure long-term stability.

More detail via Reuters here… ( Image via Reuters )

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