Soaring debt interest payments and sluggish growth have left the UK Chancellor Jeremy Hunt with little scope for pre-election tax cuts, latest analysis suggests.
Hunt warned last week of “difficult decisions” for the public finances in his Autumn Statement on November 22, as the government faces up to a difficult economic backdrop.
Today’s report from the Institute for Fiscal Studies think-tank backs this up, highlighting the tough situation Hunt faces as he deals with calls from the right of the Conservative party to push through tax giveaways before the next general election.
It said an “ill-timed fiscal loosening might give a short-term economic sugar rush, but could ultimately mean a protracted recession as interest rates rise even further to bring inflation back under control.”
Public borrowing is forecast to reach £112 billion this year, or 4.2% of gross domestic product, said the IFS.
The figure is well above the long-run average, and £60 billion more than forecast in the 2022 spring Budget.
As a result, national debt will remain stuck at close to 100% of national income, even with tight public spending settlements and further increases in taxes lying ahead.
The IFS said adjusting the OBR’s March 2023 forecast for current market expectations for interest rates could, on its own, add £20 billion to debt interest spending in 2026-27.
Hunt’s headroom against his own fiscal targets relies on tax and spending plans whose credibility is “questionable”, the IFS said.
The plans include a six-year freeze in personal tax allowances and thresholds that amounted to a “colossal” £52 billion tax increase, the IFS said, arguing Hunt would come under political pressure to end it early.
“We are in a horrible fiscal bind,” said Paul Johnson, director of the IFS. “The price of our high levels of indebtedness, failure to stimulate growth, and high borrowing costs is likely to be a protracted period of high taxes and tight spending.”