IFS: Britain in ‘Horrible Fiscal Bind’ Amid High Debt Spending

Chancellor of the Exchequer Jeremy Hunt leaves 11 Downing Street in London, on March 15, 2023. Stefan Rousseau/PA Wire

The UK is in a “horrible fiscal bind,” where poor growth and high spending on debt interest will lead to a period of high taxes, leading economists have warned.

The Institute for Fiscal Studies (IFS) has analysed the economic challenges facing Chancellor Jeremy Hunt, as he is preparing to deliver the Autumn Statement on Nov. 22.

The IFS Green Budget said there was little room for tax cuts or increased spending at a time when the UK economy “remains stuck between weak growth but continued inflationary risks.”

The current inflation rate is at a historically high 6.7 percent, while the interest rates were brought to 5.25 percent last month after 14 consecutive rises since Dec. 2021.

The IFS expects inflation to drop to a little over 4 percent by the end of the year, which will see Prime Minister Rishi Sunak meet his goal to halve inflation.

However, the institute warned that this should not be taken as “a sign of complacency with respect to the inflationary risks.”

In its green paper, the IFS warned that the government is in no position to offer fiscal giveaways, faced with very high spending on debt interest over the next few years.

The national debt will be stuck at close to 100 percent of national income, even with tight spending settlements and further big tax rises in the pipeline, said Director of IFS Paul Johnson.

UK’s national debt was over £2.5 trillion at the end of the first quarter of the year. The costs of servicing that debt have also risen sharply, reaching the highest level since 2002.

The government cannot risk losing revenue by cutting taxes. While the chancellor hasn’t confirmed tax increases in his new budget, he also hasn’t made any promises to cut taxes.

On the contrary, last month, Mr. Hunt said that tax cuts were “virtually impossible.”

Fiscal Giveaways

The chancellor also cannot afford “any ill-timed fiscal giveaways,” the report said. This comes amid pressure on the government to up spending on public services, such as health care, defence and childcare.

Mr. Hunt’s plans to increase day-to-day public service spending by just 1 percent a year after next year. This would mean cuts to health, defence and childcare sectors, among others.

“That will be tough medicine for them to swallow, meaning there will be pressure to increase spending by more than planned,” the IFS said.

Under current circumstances of high levels of debt and debt interest, Mr. Hunt will have to carefully balance the economic and the political cost of increasing public spending.

It’s ultimately a political choice, said the Green Budget’s analysis report.

Whether it is the Conservatives or Labour in charge after a general election, the report challenged the government to “be open about the trade-offs they face and how they plan to respond to them.”

Mark Franks, director of Welfare at the Nuffield Foundation, said that with growing funding needs of the NHS, efficient taxation and public spending were “vital.”

The government said it was on track to get debt falling and it would not be deterred by changes to economic growth, inflation and interest rates.

“We must stick to our plan that we are delivering to halve inflation, which will help unlock sustainable growth, support families with the cost of living and get debt falling,” a Treasury spokesman said.

Using analysis by Citi, the IFS report warned that Britain will fall into a moderate recession through the first half of 2024.

A recession takes place when the GDP falls for two three-month periods in a row.

The IFS expected the GDP to fall 0.7 percent by 2024, followed by growth of 0.4 percent in 2025. The institute’s predictions are more pessimistic than that of the Office for Budget Responsibility and the Bank of England.