Chancellor Jeremy Hunt has been urged not to fund potential tax cuts with further unspecified future spending cuts in public finances in his upcoming Budget.
He should not ignore the additional pressures on local government and other services that come with an expected faster population growth, according to the Institute for Fiscal Studies (IFS).
In a new report providing context for the Budget in March, the IFS found that there is “a weak economic case for another sizeable net tax cut”.
Hunt must not bank the higher revenues that come from an expected larger population or cut back provisional spending plans for the next parliament further to create additional space for tax cuts, the report concluded.
Additionally, although the outlook for spending on debt interest has “improved slightly” since November’s Autumn Statement, the report found, “the fact remains that public sector net debt will barely be on course to fall in five years’ time, and only on the basis of plans for fuel duties, business rates and, in particular, day-to-day spending on public services that are unlikely to be realised”.
Public finances “remain in a poor position”, the report added, with the chancellor “only just on course to meet his commitment for debt to be falling as a share of national income in five years’ time” at the Autumn Statement.
Despite this, debt was forecast to be persistently stuck above 90% of national income over the medium term, the IFS said. “This is in sharp contrast to the not-so-distant March 2022 Budget, when official forecasts were for public sector debt in 2026–27 to be more than 13% of national income lower, and on a decisively downward path. Even if the outlook for borrowing did improve significantly, net tax cuts should not be implemented before the cuts implied by the current spending totals are allocated to individual departments.”
The Autumn Statement forecasts were predicated on a fresh round of spending cuts, the IFS said. Public sector investment is planned to be frozen in cash terms, whereas maintaining investment (net of depreciation) at its current share of national income in 2028–29 would require an additional £20bn of spending.
While day-to-day spending on public services would rise in real terms by £17bn overall, after accounting for plausible settlements for spending on the NHS, childcare, defence, schools and overseas aid, other areas of government would face real-terms cuts of £18bn by 2028–29. This is equal to an average cut of 3.4% a year for four years or an average cut to per-person spending of 4.0% a year, the IFS said.
“It is possible that these spending plans will be delivered. But there is clear risk that whoever is in office after the next election is unwilling or unable to deliver them. Maintaining real-terms spending on unprotected services would require a cash top-up of £20bn; maintaining it in per-capita terms would require a cash top-up of £25bn,” the IFS report stated.
Reducing the planned growth rate in overall public service spending from 0.9% to 0.75% – which the IFS said the chancellor has been reported to be considering – would add around £3bn to the cuts facing unprotected areas.
Martin Mikloš, a research economist at IFS and an author of the report, said: “In November’s Autumn Statement, the chancellor ignored the impacts of higher inflation on public service budgets and instead used additional tax revenues to fund eye-catching tax cuts.
“At next week’s Budget, he might be tempted to try a similar trick, this time banking the higher revenues that come from a larger population while ignoring the additional pressures that a larger population will place on the NHS, local government and other services. He might even be tempted to cut back provisional spending plans for the next parliament further to create additional space for tax cuts.
“The chancellor should resist this temptation. Until the government is willing to provide more detail on its spending plans in a Spending Review, it should refrain from providing detail on tax cuts.”
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