Next UK government faces historic challenge to curb debt, report finds

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The next UK government will find it harder to cut public debt than any administration since the second world war, a top think-tank has warned, underscoring the tough tax and spending choices that loom after the general election. 

The findings came as Sir Keir Starmer, Labour leader, accused the Conservatives of “trying to salt the ground” by leaving the next UK government on a trajectory of painful spending cuts and grim public finances with its promises of tax cuts ahead of the general election. 

According to new research from the Institute for Fiscal Studies, the next UK government will by one measure have a tougher job getting public debt to decline as a share of gross domestic product than during any previous parliament since 1951.

Both the Conservatives and Labour claim they will achieve that goal in a bid to keep the public finances on solid ground.

But the target will be difficult to hit given the prospect of lower-than-average nominal GDP growth of 3.6 per cent a year, combined with high debt interest spending amounting to 3.7 per cent of GDP, according to the IFS.

The IFS warned of painful choices that “cannot be wished away”, and added that the “miserable” inheritance left after the election would require the next chancellor to make harsh decisions aimed at further bolstering tax revenue or bearing down on public spending.

“For a chancellor with a goal of reducing debt as a fraction of national income, things have arguably never been so bad,” the report said. 

Chancellor Jeremy Hunt has been hinting at fresh tax cuts in the coming Budget, on top of the £20bn of reductions to personal and business taxes he announced in November, as he attempts to claw away at Labour’s consistent opinion poll lead. 

Starmer told journalists that Sunak’s fiscal decisions showed a lack of responsibility.

“I think it’s very obvious that they are trying to salt the ground,” the Labour leader told journalists on Wednesday. “They briefed the autumn financial statement out as a series of traps for Keir Starmer and the Labour party,” he added.

The scope for tax cuts will hinge heavily on the remaining “fiscal headroom” that the government has as it seeks to meet its self-imposed fiscal rule of ensuring public debt falls as a share of GDP in five years.

Richard Hughes, chair of the Office for Budget Responsibility — the government’s official fiscal watchdog — told peers on Tuesday that the £13bn budget headroom forecast in Hunt’s Autumn Statement in November was heavily exposed to changing assumptions on interest rates and data revisions. 

He added that the government provided “almost no detail” on how it intended to deliver public services after the election, when spending is projected to grow more slowly than the economy, leading to a significant squeeze.

“Some people refer to that as a work of fiction — that’s probably generous given that someone has written a work of fiction,” he said. “The government hasn’t even bothered to write down what its public spending plans are.”

James Bowler, Treasury permanent secretary, took exception to Hughes’s remarks, telling MPs on Wednesday: “I don’t agree with that. I don’t agree with the language used.” He said the government was following normal practice.

However, Starmer claimed the government was “not even pretending they are taking decisions in the best interests of the country”. He added: “They are making decisions in the best interests, as they see it, of the Tory party and their best chance of creating divides into the election.”

The IFS warned that announcing fresh, permanent tax cuts now would be a risky course to take given the volatile fiscal outlook. “Even if one believes that now is indeed the right moment for tax cuts, tax cuts today must add to the risk that either tax rises or spending cuts are required further down the line,” the report said. 

It added that both parties “must be honest with the public about the tough trade-offs they will inevitably have to make on tax and spending”.

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