Overview

The UK finds itself in an unfortunate economic and fiscal bind. Living standards have endured an unprecedentedly long stagnation. Taxes are at record levels for the UK (though remain low to-middling by European standards). Public services are showing visible signs of strain and are, in many cases, performing less well than they were in 2010. Further tax rises and further cuts for most public services are built into current plans. But on official forecasts, this is only just enough to stabilise government debt as a fraction of national income.

This will be a thorny inheritance for whoever is in office after this year’s general election. Both Labour and the Conservatives have promised to reduce debt as a fraction of national income. Yet a combination of high debt interest payments and low growth is forecast to make this much more difficult to achieve than in the recent past. In fact, on one measure, it will be more difficult to reduce the debt-to-GDP ratio over the next parliament than in any other parliament since the 1950s.
Everything is harder when the economy is growing slowly and the public finances are more constrained. All manner of policy problems will be more difficult to tackle, and all manner of trade-offs will be more acute.

Key findings 

1) Current government spending plans include a large cut to public investment over the rest of the decade. Even with Labour’s plans for an extra £20 billion of ‘green investment’, total public investment would still be forecast to fall. Higher investment might boost our future prosperity but, without scope to increase debt, would mean less consumption now – a difficult ask when living standards have been squeezed for so long.

2) When the public finances are so constrained, tax cuts today add to the risk of tax rises or spending cuts tomorrow. It might be easy to announce immediate tax cuts, without any hint of what it is the state currently does that it will stop doing, or what taxes will rise in future, but this trade-off cannot be wished away.

3) A tight funding environment will make it more difficult to rebalance public service spending. Under reasonable assumptions for day-to-day spending on the NHS, schools, defence, international aid and childcare, the government’s plans imply a £20 billion cut to day-to-day spending on other public services. And if no extra money is available, you cannot increase spending on preventative services, for example, without making cuts elsewhere. Desperately needed rationalisation of local government finance is much harder. It will also be harder to pursue desperately needed tax reform without creating losers.

4) Net immigration is at record levels, and both major parties have pledged to bring it down. But a substantial reduction in the number of foreign care workers would pose enormous challenges for the adult social care sector. Similarly, the university sector is increasingly dependent on income from foreign students. The parties seem less keen to talk about the additional funding for social care, or the higher tuition fees for domestic students, that would almost certainly be required if immigration numbers were sharply reduced (unless provision in these areas is to be scaled back).

5) The UK has made good progress towards its net zero target and much better progress than many other high-income countries. But we are running out of low-hanging fruit. The next stage of the transition, especially reducing emissions from the heating of residential and commercial buildings, will mean pursuing policies that impose explicit – and potentially highly salient – short-term costs on households and businesses. This may well be a price worth paying, but it will not be pain free.

6) The amount spent on disability benefits is large and rising rapidly as the number of claimants continues to grow. For politicians looking to cut taxes or increase spending elsewhere, these (and working-age benefits more broadly) might look like a tempting place to go in search of savings. But the generosity of many working-age benefits has already been cut, and to do more could cause more serious hardship. Previous efforts to rein in spending have also struggled to achieve their objectives.

7) In many policy areas, the gains from reform or action are spread across a large number of people, but the losses are concentrated among a much smaller – and more vocal – group. This is true of the transition to net zero (e.g. where erecting pylons to transport electricity to where it is needed brings national gains but upsets local communities), housing policy (for similar reasons), tax reform (which inevitably creates losers as well as winners), and much else besides. Financial compensation for the losers from any reform can help ‘grease the wheels’, but comes at a fiscal cost at a time when funding is scarce.

These challenges – unlike a conflict, pandemic or financial crisis – are entirely predictable. None can be meaningfully confronted by a government that wilfully ignores reality and the need to choose between difficult competing options. As tempting as it may be to engage in ‘cakeism’ – to seek to have the government’s fiscal cake and eat it – any party serious about governing after the election should resist the urge. The electorate surely deserves better than that.