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Chancellor Rachel Reeves will need to spend billions of pounds more to deliver on the government's pre-election promises, according to calculations by the influential think tank Institute for Fiscal Studies (IFS).
The government has promised not to return to “austerity” in public services and to stimulate public investment, intended to revive growth.
But to deliver on these commitments, the chancellor will need to “seize the moment” and propose an extra £16 billion on top of the £9 billion in tax increases set out in the Labor manifesto, the IFS said.
The Chancellor is currently finalizing the details of her first Budget, which will be announced on October 30.
Reeves will explain how she plans to deliver on a series of manifesto promises against a tangle of self-imposed restrictions on borrowing, spending and debt.
This will be the government's first major step, an opportunity to set out its priorities and values, and restore the political tone after a backlash over clothing and hospitality donations.
More of the tax burden is expected to fall on high earners, following the government's surprise decision to limit winter fuel payments to poorer pensioners. Some also hope for the removal of the limit of two children for the payment of allowances.
But Reeves' first budget comes against a backdrop of higher debt from the pandemic, higher interest payments to finance that debt and inflation that has only recently returned to normal levels. A growing and aging population and the climate transition impose additional challenges.
The new government has inherited an “unenviable” situation in terms of public finances, the IFS said in its regular pre-budget analysis of public finances.
Growing pressures on health and pensions, combined with falling revenue from fuel and tobacco taxes, made the situation more difficult, but tough decisions were needed, said IFS director Paul Johnson.
“If Ms Reeves doesn't grasp the nettle on October 30, it could come back to sting her again before the next election,” Mr Johnson said.
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Protective services
The IFS, working with economists at investment bank Citi, calculated the amount of extra revenue the chancellor would need to avoid deep cuts to public services. This is based on its commitment to ensuring that daily expenses are financed by tax revenues.
Economic forecasts are not precise; Stronger-than-expected growth could give the government more room to maneuver, while weaker growth could mean cuts would still be necessary.
The IFS said the £9bn tax rises already planned by the Chancellor could be enough to keep spending at current levels, including taking inflation into account, even if forecasts were so tight that They were “on the edge of the knife”.
However, many public services, including prisons, higher education and local authorities, are struggling to meet current needs. Pressures are expected to increase, particularly in social care and the NHS, and the government has promised additional health staff and other reforms.
To meet this growing need without deteriorating public services and to deliver on manifesto promises, the IFS said spending in real terms would need to increase with the size of the economy, by around 2.8%. which would require an additional £16 billion in funding.
New rules
Spending increases that simply keep pace with inflation, or even those that remain stable as a proportion of the size of the economy, would not be enough to transform public services, the IFS warns.
Even the largest increase remains far less generous than the 3.3% increase promised by Rishi Sunak in 2021. When Boris Johnson announced the “end of austerity” in 2020, he pledged to increase spending averaged 4.1% year-on-year, the IFS said.
The new government is also committed to boosting investment. However, the chancellor indicated she would likely view capital spending as separate from day-to-day spending and would consider borrowing more to finance it.
It is also expected to change the way the UK's debt burden is measured and, therefore, the constraints placed on public borrowing. Before the election, Labor said it would stick to Conservative promises to reduce debt as a proportion of economic output by the fifth year of the forecast.
The IFS said increased investment was an important part of addressing the UK's low growth, but said “significant additional borrowing to finance this investment would be risky”.
The UK had high debt levels, substantial borrowing and a current account deficit, meaning it imports more than it exports, making it more vulnerable than the eurozone or states -United in the face of pressure on borrowing.
“Some additional investments may therefore have to be financed by higher taxes,” the IFS said.
