- Written by Faria Masoud and Tom Espiner
- Business correspondents, BBC News
Chancellor Jeremy Hunt has hinted at tax cuts in next spring’s budget
Promises to cut taxes during general election campaigns may have to be reversed as Britain’s economy faces some of its worst problems since the 1950s, a leading think tank has said.
“Today’s tax cuts increase the risk of raising taxes or cutting spending tomorrow,” the Institute for Fiscal Studies said.
She added that politicians need to be honest about the difficult economic trade-offs.
But the Treasury said the economy was going through a difficult period, and growth would mean more funding for public services.
IFS director Paul Johnson said that if political parties looking to form the next government “are promising tax cuts, then let’s hear where the spending cuts go.”
The institute’s report said: “It may be easy to announce immediate tax cuts, without any indication of what the state is currently doing and will stop doing, or what taxes will rise in the future, but this trade-off cannot be eliminated.” He said.
The government gets most of its income from taxes, but if it cannot cover its spending, it must either borrow more, raise taxes, or cut public spending.
Analysts said this gave Chancellor of the Exchequer Jeremy Hunt “more room to manoeuvre” to cut taxes.
However, the IFS said it would be more difficult for the next government to reduce the amount of debt the UK compared to its economic output “than any other Parliament since the 1950s” – just after the Second World War.
The national debt reached levels last seen in the 1960s after the government spent billions to prop up the economy during the Covid pandemic and subsidized energy bills after a spike in energy prices caused in part by Russia’s invasion of Ukraine.
Interest payments on this debt, combined with slower growth, will make lowering the debt-to-GDP ratio more difficult.
The Institute for Fiscal Studies added that there would be “limited scope to cut taxes or increase spending by a significant amount”, because the two main parties across the UK – the Conservatives and Labor – have pledged to reduce the national debt as a share of national income.
Last week, Hunt hinted he was aiming to cut taxes in the Spring Budget.
In his Autumn Statement in November last year, Hunt announced a £10bn National Insurance cut for millions and a rise in benefits, claiming the Conservatives had delivered the biggest tax cuts in decades in a move to boost the UK’s sluggish economy and boost incomes. .
However, the UK’s overall tax burden remains at a record level, largely due to a freeze on tax thresholds.
The institute said that in light of weak economic growth and the cost of living crisis, the chances of any government winning are “miserable.”
To meet its spending commitments on the NHS, defence, childcare and international aid, the UK will need to save £20bn to avoid cuts in other services, the IFS said.
Ben Zaranko, chief research economist at the IFS, told the BBC that long-term challenges facing the economy such as an aging population and tough climate commitments “will start to take their toll” this decade.
But the Treasury said its action “to halve inflation and ensure debt as a share of the economy falls means we are now starting to turn the corner, which is why we can afford tax cuts for 27 million workers this month.”
A spokesperson said: “The best way to deliver sustainable funding for public services into the future is to grow the economy – the UK has grown faster than France, Germany and Japan since 2010, and the Office for Budget Responsibility says our action in the spring and autumn will provide the biggest boost ever.”
However, a Tory spokesman said: “This unfunded spending promise will ultimately mean thousands of pounds higher taxes for working people. This is because Keir Starmer cannot say how he will pay for it because he has no plan.”
The Labor Party has been contacted for comment.