Any tax cuts promised at the next general election will need to be quickly reversed, the Institute for Fiscal Studies (IFS) has warned the government.
In a bracing warning to the government, the think tank said Britain faces the worst debt challenge since the 1950s, the challenge of which cannot be “meaningfully confronted by a government that wilfully ignores reality”.
The chancellor is said to be considering a package of tax cuts as part of a pre-election giveaway
Jeremy Hunt, the chancellor of the exchequer, is said to be considering cuts to income tax or further cuts to national insurance in his March budget, as improved OBR forecasts suggest the chancellor has an extra £15bn to £20bn of headroom within his target to get debt falling in five years’ time.
However, the IFS has today warned that the increasing cost of debt interest means this will prove more difficult to manage in the coming year than at any time for decades.
The report said: “These challenges – unlike a conflict, pandemic or financial crisis – are entirely predictable. None can be meaningfully confronted by a government that wilfully ignores reality and the need to choose between difficult competing options. As tempting as it may be to engage in ‘cakeism’ – to seek to have the government’s fiscal cake and eat it – any party serious about governing after the election should resist the urge. The electorate surely deserves better than that.”
Speaking at the annual World Economic Forum meeting, Mr Hunt said that countries with lower tax burdens have “dynamic, faster growing economies”.
In last year’s autumn statement, Mr Hunt announced a £10bn National Insurance cut for millions, claiming the Conservatives have delivered the biggest tax cuts in decades.
However, the UK’s overall tax burden as a percentage of national income is at a post-war record high, in part due to frozen tax thresholds.
The government is now expected to be considering a larger package of tax cuts as part of their pre-election offering, in the hope of swaying voters towards the Conservatives.
Yesterday, Sir Keir Starmer told journalists that he was concerned that the Tories would “salt the ground” by squandering money in pre-election tax cuts that would leave an incoming Labour administration vulnerable to poor public finances and difficult spending decisions.
Keir Starmer said the conservatives are ‘not acting in the national interest’ with their tax-cutting agenda
Now, the IFS has said prospects for any winning government are “miserable” due to weak economic growth and the cost-of-living crisis. It warned that Mr Hunt cannot “wish away” the likely prospect that any tax cuts in the spring will either lead to later tax rises or spending cuts as future governments try to grapple with the spiralling cost of debt and flailing public services.
The IFS also warned that Labour’s £28bn green prosperity plan will mean even less money for day-to-day spending, but still leave state investment lower than it currently is.
Paul Johnson, director of the IFS, urged both parties to “be honest” about their plans. “If they are promising tax cuts, let’s hear where the spending cuts will fall. If they are going to raise, or even protect spending, they should tell us where taxes will rise,” he said.
The IFS has also questioned the wisdom of tax cuts at the cost of public spending while the population is ageing, defence spending is rising, and voters are demanding better public services.
In an effort to borrow less, the government plans to cut infrastructure investment in real terms, resulting in a decrease in investment by about £20bn. This would equate to cuts to public services outside of the NHS, schools and aid – but the detail of this has not yet been set out.
The government announced a national insurance tax cut back in the Autumn
Earlier this week, Richard Hughes, chairman of the Office for Budget Responsibility, dubbed these plans a “work of fiction”, as the current projected headroom “is very small relative to the forecast errors inherent in any forecasting process, including ours”.
He also criticised the chancellor’s refusal to provide detailed information about Whitehall departmental budgets to help the OBR calculate it’s forecasts back in November.
Responding to the IFS report, a Conservative Party spokesman said:
“This shows Labour’s £28bn a year ‘2030’ unfunded spending promise will end up meaning thousands of pounds of higher taxes for working people.
“That’s because Keir Starmer can’t say how he would pay for it as he does not have a plan.”
The Labour party have been approached for comment.
