LONDON – Leading British economic think tanks warned Thursday that whoever wins the general election expected this year will face some very tough choices on tax and spending if they want to make sure the public finances don't deteriorate further.
After number-crunching Wednesday's budget statement from Treasury chief Jeremy Hunt, which reduced a tax paid by employees on their earnings for a second time in four months, both the Institute for Fiscal Studies and the Resolution Foundation said the economic inheritance facing the next government will arguably be one of the bleakest any has faced since World War II.
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They said the combination of high interest payments on debt and muted economic growth mean that both the governing Conservative Party and the main opposition Labour Party will struggle to deliver on their ambitions.
Analysts said the extremely tight projected path of government spending over the coming years was unrealistic, or in the words of Torsten Bell, the chief executive of the Resolution Foundation, a “fiscal fiction,” given the clear demands of many public services, such as health, education, transport and justice.
A general election must take place by Jan. 2025, but it could come as soon as May. With opinion polls showing that his Conservative Party, in power since 2010, is heading for one of its biggest ever defeats, the prevailing view is that Prime Minister Rishi Sunak will opt to go to the country in the fall, potentially at the same time as the U.S. presidential election.
On Thursday, following the budget statement, Labour leader Keir Starmer once again challenged Sunak to call an election for May, while the prime minister brushed aside any questions about its timing.
“The task for whoever wins is huge,” said the Resolution Foundation's Bell. "They will need to both wrestle with implausible spending cuts, and also restart sustained economic growth — the only route to end Britain’s stagnation.”
Like others, the British economy has taken a battering over the past few years as a result of the coronavirus pandemic and the cost-of-living crisis following Russia’s invasion of Ukraine. In combination, they have pushed the country's debt level up to near 60-year highs above 90%.
As a result, the government has been pushed into raising taxes over the past few years and despite Wednesday's cut in national insurance, the overall tax burden is expected to rise to its highest level since the late 1940s. Unsurprisingly, living standards, on average, have fallen since the Conservatives won the last election in Dec. 2019.
Paul Johnson, director of the Institute for Fiscal Studies, said the next parliament “could well prove to be the most difficult of any in 80 years” for anyone wanting to bring debt down as a proportion of national income.
The lesson of the short-lived premiership of Liz Truss in the fall of 2022 is a reminder that a lack of credibility on the public finances can lead to a lot of financial trouble. Her unfunded tax cuts roiled financial markets and sent borrowing costs surging. Those days of chaos caused a slump in the Conservative Party’s poll rating.
“Even stabilizing debt as a fraction of national income is likely to mean some eye-wateringly tough choices — and we are talking tens of billions of pounds worth of tough choices — on tax and spending,” he said.
Neither the Conservative Party, nor the main opposition Labour Party, have laid out how they can meet their wider policy objectives given the fiscal constraints. It's clear after Wednesday's budget that the Conservatives will make tax cuts a central plank of their proposition to extend their time in power, while Labour will fight the election on the need to improve the public services.
“Government and opposition are joining in a conspiracy of silence in not acknowledging the scale of the choices and trade-offs that will face us after the election,” said Johnson. “They, and we, could be in for a rude awakening when those choices become unavoidable.”