UK taxes are heading to record-high levels as a share of national
income. The Chancellor is under pressure to announce cuts. But
government debt is high and rising, and barely on course to be
falling in five years’ time – that being the fiscal rule the
government has set itself.
Even this unhappy outlook for the public finances is predicated
on a fresh round of post-election spending cuts. Unless
the Chancellor is willing to spell out where the cuts will fall,
the temptation to scale back provisional spending plans further
to ‘pay for’ new tax cuts should be avoided.
This is the main finding of a new report, by researchers at the
Institute for Fiscal Studies and funded by the Economic and
Social Research Council. In particular, it finds:
-
Faster population growth, as projected by the Office
for National Statistics (ONS) last month, could boost revenues
but it will also make keeping to existing spending plans
harder. Under the Chancellor’s November forecast,
real-terms day-to-day spending on public services is set to
grow by 0.9% a year on average from 2025–26 onwards. At the
time, this was expected to translate into growth in per-person
spending of 0.5% a year. Under the new ONS population
projections, this falls to just 0.2% a year. Plausible
settlements for the NHS, childcare, defence, schools and
overseas aid would mean real-terms cuts for other areas of
government spending. Maintaining real-terms spending on
unprotected services would require a cash top-up of £20 billion
in 2028–29; maintaining it in per-person terms would require a
cash top-up of £25 billion. Reducing the planned
growth rate in overall public service spending from 0.9% to
0.75% – as the Chancellor is reportedly considering – would add
around £3 billion to the cuts facing unprotected areas.
-
Current plans already imply investment spending being
cut as a share of national income by £20 billion a year in
today’s terms by 2028–29. This would reverse the big
increase in investment spending that has been delivered since
2019. It will not help growth. If it happens, it would be a
repeat of the sharp fluctuations which have characterised UK
investment spending for many decades, fluctuations that hamper
growth and create uncertainty, inefficiency and poor value for
money.
- Much is being made of the fact that debt interest spending is
likely to be forecast to be £10 billion less in 2028–29 than was
expected in the Autumn Statement. This could provide the
Chancellor with additional ‘headroom’ against his fiscal target.
But high debt interest spending remains a big constraint.
It is now expected to settle at 2% of national income – £55
billion a year in today’s terms – above what was forecast prior
to the pandemic. Market interest rate expectations
remain very volatile and high gilt issuance, exacerbated by the
Bank of England’s programme of active gilt sales, is forecast to
result in private sector gilt holdings having to rise by 7.9% of
national income in 2024–25 – the biggest increase on record. Over
the next five years, this is forecast to average 6.2% a year
which is more than twice the 2.8% a year seen over the last 25
years. The outlook for debt interest spending therefore remains
extremely uncertain.
Martin Mikloš, a Research Economist at IFS and an author
of the report, said:
‘In November’s Autumn Statement, the Chancellor ignored the
impacts of higher inflation on public service budgets and instead
used additional tax revenues to fund eye-catching tax cuts. At
next week’s Budget, he might be tempted to try a similar trick,
this time banking the higher revenues that come from a larger
population while ignoring the additional pressures that a larger
population will place on the NHS, local government and other
services. He might even be tempted to cut back provisional
spending plans for the next parliament further to create
additional space for tax cuts.
‘The Chancellor should resist this temptation. Until the
government is willing to provide more detail on its spending
plans in a Spending Review, it should refrain from providing
detail on tax cuts.’
Other key findings of the report include:
- Borrowing this year is now on course to be £113 billion.
While this would be £11 billion below the £124 billion forecast
in November, it would be £63 billion more than forecast in March
2022 and more than twice what was borrowed in 2018–19 prior to
the pandemic. In any case, what really matters for the
Chancellor’s Budget options is the extent to which this
short-term improvement translates into a lasting improvement in
the OBR’s forecasts.
- The Chancellor has a fiscal rule to get debt falling in the
fifth year of the forecast period. While aiming to have debt on a
falling path in the medium term is commendable, this is a badly
designed rule. The Chancellor appears to be gaming his own fiscal
rule. By pencilling in unspecified spending cuts towards the end
of the period, he appears to meet the rule, but he is doing so in
a way that will lack credibility and transparency until he tells
us where he intends to find those cuts.
- Tax cuts without tax reform would represent another missed
opportunity. If the Chancellor is determined to cut taxes and
wants to boost growth then better options exist than simply
cutting the rates of income tax, National Insurance contributions
or inheritance tax. Stamp duties on purchases
of properties and shares are particularly damaging taxes and
should be towards the front of the queue for growth-friendly tax
cuts.
- Taxes in 2023–24 will be around £66 billion higher than they
would have been had their share of national income remained at
its 2018–19 level. Whatever cuts may be announced in the Budget,
we are still likely to see taxes rise by a record-breaking amount
over this parliament.
ENDS
Notes to Editor
The context for the March 2024 Budget is an IFS report
by Carl Emmerson, Martin Mikloš and Isabel Stockton.
