IFS Warns Against Pre-Election Tax Cuts Due to UK Fiscal Challenges

The Institute for Fiscal Studies (IFS) has issued a stern warning that there is “no room” for tax cuts or spending increases before an election. In its annual assessment of UK tax, spending, and borrowing, the influential think tank expressed concerns about the country’s fiscal situation, characterising it as a “horrible fiscal bind.” The IFS emphasised that “ill-timed” pre-election tax cuts could be detrimental and unsustainable.

The warning comes amid a substantial increase in the tax burden, with the IFS projecting that 4.5 million more individuals will be pushed into higher income tax thresholds by 2028. This surge in tax revenue is attributed to the prime minister’s decision to freeze tax thresholds for six years, effectively creating a tax rise amounting to £52 billion annually by 2028, a substantial increase from the original forecast of £8 billion.

The IFS cautions that implementing pre-election tax cuts in the current financial climate could lead to economic instability and necessitate higher interest rates. The next general election is expected to take place in January 2025.

Despite the perception of high taxes and increased government revenues exceeding non-interest spending, the country faces long-term financial pressures, including spending on social care and the National Health Service (NHS). The government’s recently announced NHS workforce plan alone could potentially cost £50 billion annually.

The anticipated increase in government borrowing costs, driven by higher-than-forecast interest rates, is likely to result in elevated borrowing levels. Moreover, the economy is forecast to experience sluggish growth or possibly even a shallow recession in the coming year.

Chancellor Jeremy Hunt has acknowledged the need for financial prudence, as volatility and shocks, particularly stemming from Russia’s invasion of Ukraine, have extended beyond initial expectations. However, he faces pressure from both within his party and from the opposition. The opposition party, Labour, contends that the economy requires more investment and proposes spending an additional £20 billion by the end of the next parliamentary term if they win the next election.