Anemic growth and the highest sustained interest bill since the 1980s mean Chancellor of the Exchequer Jeremy Hunt cannot afford to slash UK taxes before the next election, the Institute for Fiscal Studies warned.
(Bloomberg) — Anemic growth and the highest sustained interest bill since the 1980s mean Chancellor of the Exchequer Jeremy Hunt cannot afford to slash UK taxes before the next election, the Institute for Fiscal Studies warned.
The think tank said the UK is in a “horrible fiscal bind” and urged the Chancellor to resist an unfunded package of pre-election tax cuts to placate anxious Conservative MPs and boost short-term growth.
The Green Budget analysis, carried out with Citigroup ahead of the Autumn Statement on Nov. 22, warned of the prospect of bigger deficits in the medium term and a raft of growing fiscal pressures, including spending on the National Health Service and the military.
The gloomy assessment underscores how little wiggle room Hunt has as he and Prime Minister Rishi Sunak seek to revive their Conservative Party in opinion polls before a general election expected next year.
They are coming under increasing pressure from Tory MPs to ease the highest tax burden since World War II, a move the Green Budget said might provide a “short-term economic sugar rush” but end in a protracted recession and even higher interest rates.
“The current environment is one where inflation is still high, interest rates are rising. That does not look does not look like the environment where you should be engaging in a fiscal loosening,” said Carl Emmerson, deputy director of the IFS.
The Green Budget said:
- Debt-interest spending will be around £30 billion ($36.6 billion) a year higher than normal, settling at the highest sustained level since the mid-1980s
- Debt as a share of national income is set to rise to and settle just below 100% of GDP. Headroom against a target to have debt falling in five years does not “indicate space for tax cuts”
- A 1% a year increase in day-to-day public service spending after next year now implies cuts to most public-service spending, given commitments on health, defence and childcare
- Citigroup expects a moderate recession in the first half of next year and for unemployment to rise to 5.8% by the end of 2024, from 4.3% currently.
Sunak and Hunt sought to stabilize the public finances at the Autumn Statement last year after they succeeded the short-lived premiership of Liz Truss, who rocked markets with a £45 billion package of unfunded tax cuts.
Borrowing in the current fiscal year will be £20 billion lower than the Office for Budget Responsibility expected in March, the IFS forecast. However, there will be higher deficits in the medium term than previously predicted, with the OBR likely to cut its growth forecasts, it said.
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