The fiscal challenge awaiting the next government will hang over the election campaign like a dark cloud

25 May 2024
The fiscal challenge awaiting the next government will hang over the election campaign like a dark cloud. Both main parties have a clear commitment to get debt falling as a share of national income. But a combination of high debt interest payments and low expected growth is forecast to make that more difficult to achieve than in any parliament since at least the 1950s.

Taxes as a share of national income are forecast to grow from 36.5% of national income in 2024–25 to 37.1% in 2028–29, not least due to an ongoing freeze to the cash value of income tax thresholds (a freeze which has another three years to run). Spending on everything other than debt interest is set to fall from 40.8% to 39.0% of national income. The fact that this is only just enough to stabilise debt in five years’ time speaks to the difficulty of the economic and fiscal inheritance awaiting the next government. 

To get debt falling, latest forecasts suggest that the government will need to run substantial primary surpluses – to raise more in tax and other revenues than it spends on everything other than debt interest. The country has not achieved that for more than 20 years.

The next government effectively has three broad options. It can implement the spending cuts baked into existing plans – cuts that will inevitably be painful. It can implement tax rises – over and above those already in the books. Or it can borrow more – something that is highly unlikely to be consistent with a promise to stabilise debt as a share of national income. The parties might well be reluctant to tell us which of these they would opt for upon taking office. That doesn’t mean that we should refrain from asking them. 

Paul Johnson, Director of the IFS, said:

‘One can understand why the parties want to present a positive vision to the electorate, emphasise the importance of economic growth and to present plans for how they’d aim to deliver it. There is no shortage of promising ideas to choose from. But they must also reckon with the reality of the economic and fiscal context in which this election is taking place.

Money is tight. Public services are creaking, taxes are at historically high levels, and both parties are hemmed in by their very clear pledges to get debt falling. It is only falling, marginally, on current forecasts, because tax rises and spending cuts are already baked into baseline forecasts. To avoid cuts to key public services in the post-election Spending Review would require further tax rises. Promising tax cuts would mean even sharper cuts to struggling public services.

We could get miraculously lucky with growth and escape having to make these tough choices. But we might not. Just because thousands of English and Scottish football fans are crossing their fingers and hoping for the best this summer doesn’t mean that the next Cabinet should do the same.

The next government doesn’t need to enter office to ‘open the books’; those books are transparently published and available for all to inspect. We should use them as the basis for an open and robust discussion during the election campaign.

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