No room for tax cuts or spending rises, IFS think tank warns

There is "no room" for tax cuts or spending increases before an election, an influential think tank has warned.

In its annual health check of UK tax, spend and borrowing, the Institute for Fiscal Studies (IFS) says the country is "in a horrible fiscal bind".

It warns "ill-timed" pre-election tax cuts could prove "unsustainable".

The warning comes as the tax burden rises significantly, with 4.5 million more people dragged into higher income tax thresholds by 2028, the IFS says.

The IFS calculates that the tax revenue raised by the prime minister's decision to freeze tax thresholds for six years is effectively a tax rise worth £52bn a year by 2028.

The very high rates of inflation since the policy was announced have pushed up the original forecast of £8bn a year for revenue raised in 2026.

• UK facing permanent higher taxes, think tank warns

• Interest rates expected to be held after small growth

The institute warns that pre-election tax cuts could prove "unsustainable" and "ultimately mean a protracted recession" as interest rates are forced even higher.

The next general election must be held by January 2025.

"With taxes at record levels, and government revenues forecast to exceed non-interest spending for the first time in a generation, you might expect plenty of room for either tax cuts or spending increases.

"But poor growth and very high spending on debt interest over the next few years mean that the national debt is stuck at close to 100% of national income, even with tight spending settlements and further big tax rises in the pipeline," he adds, warning of "a protracted period of high taxes and tight spending," says Paul Johnson, IFS director.

A rise in the cost of government borrowing, because of higher interest rates than forecast at the Budget, is likely to significantly increase overall levels of borrowing, the IFS says.

The economy is also forecast to grow slowly or even endure a shallow recession next year, according to the Green Budget.

All of this occurs against a backdrop of significant long-term pressures on public finances, from spending on social care to the NHS.

The IFS estimate that the government's recently announced NHS workforce plan could, by itself, cost £50bn a year long term.

The official forecasts used by the government are to be released next month alongside the Autumn Statement.

Chancellor Jeremy Hunt told the BBC that the UK had to be "prudent with the public finances" and "prepared for volatility and shocks".

He said instability from Russia's invasion of Ukraine was "proving much more protracted than people hoped" and that "we have to be honest with people that this is going to take some time".

But he faces pressure from within his own party and from the opposition.

The former PM Liz Truss is planning to release what her allies call a "Growth Budget" ahead of his Autumn Statement.

Labour believes that the economy needs more investment, and plan to spend £20bn more by the end of the next Parliament, if they win the next election.