The real budget will come after the UK election

Hunt failed to assess deep-seated problems of borrowing and taxation

The UK spring budget contained important proposals to cut national insurance rates and introduce measures that aim to improve public sector efficiency, which has deteriorated markedly in recent years. But the deep-seated problems of excessive public sector borrowing, rising demand for public services and a sharp rise in the overall level of taxation have not been properly addressed.

The aspiration to abolish national insurance contributions – which would reduce the intergenerational unfairness in the tax system that overburdens those of working age – will be impossible in the foreseeable future. The reality is that, taken together, the current plans for borrowing, public expenditure and tax rates are wholly unrealistic.

A more cautious approach would have been for Jeremy Hunt, chancellor of the exchequer, to use the modest fiscal headroom to reduce future borrowing. However, unless pressures in the bond and foreign exchange markets force a crisis reappraisal beforehand, it may be possible to get through to the general election – provided it is not delayed unduly – without the political parties confronting this unsustainable fiscal prospect.

Looking ahead

After the election, when the government will have to bring forward detailed departmental spending plans for 2025-26 and beyond, it will no longer be possible to avoid realistic decisions. It will not be a question of choosing between relatively small cuts in public services or modest increases in taxes. The post-election government will probably have to enact a combination of significant cuts to public services and borrowing, and/or hikes in tax rates.

Neither of the two main political parties wishes to discuss such measures in the election campaign, let alone include them in their manifestoes. The current fiscal prospect would daunt any government, but could be particularly difficult for Labour, which has not supported a significant discretionary tightening of fiscal policy since 1976 when the then Labour government was forced to go to the International Monetary Fund.

The UK’s fiscal difficulties are shared by other large economies that have experienced a rise in the debt to gross domestic product ratio following the 2008 financial crisis, the pandemic and the rise in energy prices after the Russian invasion of Ukraine. UK growth in 2024 could compare well with G7 peers, except the US. Inflation has fallen and the Bank of England is perceived as being cautious about reducing interest rates in the coming months.

If, as currently seems likely, the UK is not perceived as an outlier trying to run looser fiscal and monetary policies than its peers, as in the disastrous Liz Truss adventure in 2022, it may be possible to avoid problems in the gilt and sterling foreign exchange markets before the election. But, as the focus of markets and commentators increasingly turns to 2025 and beyond, the sheer unrealism of the current fiscal plans and an unwillingness to confront difficult policy choices could unsettle markets.

Difficult policy decisions

Since the 2008 financial crisis the broad approach has been try to ‘protect’ spending on health and education while taking a more stringent line on other budgets, such as justice and local authorities. More recently, the decision not to uprate tax allowances has led to a rise in the overall tax burden. This approach, which is embodied in the public expenditure plans and fiscal projections for 2025-26 onwards, has run its course.

The health and education lobbies claim to need far more than the government’s plans would allow. They have recently been joined by the defence establishment. Further large cuts would be needed by already struggling local authorities, the justice system and other services to validate the existing aggregate spending plans. The appetite for even greater rises in the tax burden by those who would pay them is non-existent.

Only a significantly higher growth rate of GDP, together with the additional tax receipts that this would produce, could avoid this prospect. Strategies for faster growth, which are usually short on specific policies, would take time to produce results and would not help with the fiscal problems of the next five years.

What should the approach be?

Against this bleak background it will be necessary to consider difficult policy choices. One reaction would be to raise taxes substantially. This cannot be achieved simply by finding easy wins where the current system is perceived as unfair (for instance with the taxation of carried interest or private school fees). It would be necessary to raise some combination of income tax, VAT and corporation tax.

Another approach would be to cut some services or to charge for them. But whether the policy response is to raise taxes or to curtail or charge for some central and local government services, it would be preferable for the election campaign and the manifestoes to cover these possibilities. The reality is likely to be the reverse. However, the later the election is held the more difficult it will be to exclude discussion of these difficult decisions. Government departments and local authorities will face an increasing operational need to know their budgets for 2025-26.

In past elections it has been possible to claim with varying degrees of plausibility that decisions could not be taken until a political party gained power and was able to ‘look at the books’. The reality is that it is already possible to have a reasonable view of forthcoming fiscal problems given the mass of information and analysis published by the Office for Budget Responsibility and by think tanks that specialise in fiscal analysis. Forecasts will change with events, but the main problems are already sufficiently clear for a full pre-election debate to be possible.

Peter Sedgwick was a senior UK Treasury official, Vice President of the European Investment Bank from 2000-06, Chair of 3i Infrastructure PLC from 2007-15 and Chair of the Guernsey Financial Stability Committee 2016-19.

Image source: UK Treasury

Join Today

Connect with our membership team

Scroll to Top