Britain’s public finances are in a mess. Difficult decisions loom once the election is over. But the public is being kept in the dark about what might happen. That, put briefly, was the gist of what the Institute for Fiscal Studies had to say about the Conservative and Labour party manifestos. The thinktank was also pretty dismissive about the plans of the smaller parties: the Liberal Democrats, the Greens and – in particular – Reform UK.
The IFS analysis is relatively simple. Debt as a share of national income is at its highest since the early 1960s. Taxes are close to the record level reached in the aftermath of the second world war. Spending has increased by more in the past five years than ever before under a Conservative government.
Yet, the thinktank says, public services – everything from the NHS to prisons – are visibly struggling. And fresh cuts of between £10bn and £20bn will be on the way for unprotected Whitehall departments if the party elected on July 4 wants to reduce debt and avoid raising taxes. The Conservative plan involves tax cuts of £17bn, paid for by cracking down on tax avoidance and evasion, and by cutting £12bn from the welfare bill, mainly by slowing the increase in claims for disability benefit. The IFS says this equates to 1.6 million people losing an average of £7,500 a year each, and would be politically hard to achieve.
Judging by the opinion polls, there is no prospect of the Conservatives forming the next government and the only question is the scale of the party’s defeat. Inevitably, the focus in the last week or so of the campaign will be on what Labour will do. The IFS is sceptical that faster than expected growth will lead to higher tax revenues and so spare Rachel Reeves from making tough choices. Stronger growth would certainly help. The IFS says that if growth exceeds the Office for Budget Responsibility forecasts by 0.5 percentage points a year – which it says is unlikely but not inconceivable – that would strengthen the public finances by £30bn annually. But it says Reeves also needs to plan for what she might do if growth turns out to be 0.5 points weaker. The shadow chancellor says sticking to the fiscal rules is non-negotiable, but as the IFS director, Paul Johnson, pointed out, to prevent debt from growing in the absence of a sizeable growth dividend, the next government would need to run a primary budget surplus: collecting more in tax than it spends on everything apart from debt interest. This is rare in the UK and, says Johnson, “not necessarily a recipe for a happy electorate”. The last chancellor to run a primary surplus was Gordon Brown a quarter of a century ago. Johnson thinks it unlikely that Reeves will cut spending, which leaves the choice between tweaking the fiscal rules, raising taxes by more than already laid out in the manifesto, or both. As the IFS notes, opposition parties that win elections tend to raise taxes in their first budget.