Next UK government faces biggest debt challenge since 1950s – report

Sluggish economic growth and high national debt will leave the next UK government facing one of the bleakest fiscal challenges since the 1950s, experts have warned.

Whichever party wins the election this year may be unable to fund existing public services if politicians are not transparent about the trade-offs they face, according to an Institute for Fiscal Studies (IFS) report.

Prime Minister Rishi Sunak and Chancellor Jeremy Hunt have for months dropped hints about tax cuts featuring in the spring Budget in March.

But the IFS said that while the prospect of further giveaways might be tempting in an election year, it will risk a future tax hike or reductions in public spending.

Interest payments

Both Labour and the Conservatives have also promised to cut debt as a fraction of national income, but this will be much harder to achieve than in recent years amid high debt interest payments and low expected growth, it warned.

“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,” the report says.

The 1950s saw a debt-to-GDP ratio of around 200% – about double what it is today – after public debt increased rapidly during the Second World War.

A new government will inherit taxes at record levels, stagnant living standards and struggling public services, yet Government spending plans suggest further cuts to areas other than health, the report says.

Under reasonable assumptions for day-to-day spending on the NHS, schools, defence, international aid and childcare, the UK is on course for a £20 billion reduction in funding for other services, the IFS said.

If no extra money is available, it will be impossible to increase spending on preventative services without making cuts elsewhere and harder to pursue “desperately needed” tax reform without creating losers, according to the report.

In a stark warning ahead of the spring Budget and the election expected in the second half of this year, the IFS said: “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.”

Trade-offs

IFS director Paul Johnson said those looking to form the next government should be “honest about these trade-offs” and “if they are promising tax cuts, let’s hear where the spending cuts will fall”.

Mubin Haq, head of abrdn Financial Fairness Trust, which funded the report along with the Nuffield Foundation, said: “With the next election imminent, there’s a danger that politicians paint themselves into a corner by failing to confront difficult trade-offs.

“They therefore risk being unable to fund existing public services or invest in new provision to kickstart our ailing economy. Fiscal constraints make these commitments tricky but not impossible.”

Mark Franks, director of welfare at the Nuffield Foundation, said “cutting investment spending would only worsen this economic bind in the long term”.

A Treasury spokesperson said: “Our decisive action to halve inflation and ensure debt falls as a share of the economy means we are now beginning to turn a corner, which is why we can afford tax cuts for 27 million working people this month.

“The best way to deliver sustainable funding for public services in the future is to grow the economy – the UK has grown faster than France, Germany and Japan since 2010 and the OBR say our action in spring and autumn will deliver the largest boost on record.”