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The Institute of Fiscal Studies (IFS), an independent economic institute, has published a report stating that the size of the state in the UK is set to remain larger than before the pandemic or the financial crisis. The report suggests that whichever party comes into power after the next election will have to make tough decisions regarding public spending. They will either need to cut spending to bring it closer to the post-World War II average or raise taxes to maintain current levels of departmental funding.
According to the IFS, spending in the last Parliament grew by 4.5 percent of national income, which is higher than any post-war Conservative government. This increase in spending has been driven by unexpected growth in debt interest and spending on social security benefits and the state pension. These areas were initially expected to remain stable or decrease, but instead, they have risen by £74 billion between 2019 and 2024.
The report also highlights that health spending and defense spending, which have faced cuts in previous decades, are set to increase. Overall, the size and cost of the state are projected to continue growing. The IFS suggests that a large portion of this increase appears to be permanent and that by 2028-29, the state will be larger than ever before.
Bee Boileau, a research economist at the IFS, explains that the next government will face a choice. They can either reduce the scope of what the state provides or accept further strain on public services. Alternatively, they can raise taxes or borrow more to maintain departmental funding levels. However, both major parties have ruled out major tax increases and have committed to debt targets that prevent them from borrowing more.
Another independent think tank, the Resolution Foundation, also released a report stating that tax rises are inevitable after the election, regardless of which party wins. The report highlights several scheduled tax increases that will affect British households. These include a 5 pence per liter increase in Fuel Duty, a reduction in the stamp duty threshold for house purchases, and rising business rates.
The Resolution Foundation emphasizes that tax increases are already part of government policy. The scale of the proposed tax changes by the major parties is smaller compared to the tax rises that have already been announced and are set to come into effect in the next parliament. Therefore, by committing to the current government’s plans, the Labour Party is effectively agreeing to these tax rises if they come into power.
Adam Corlett, a principal economist at the Resolution Foundation, urges politicians to be honest with the public about the inevitability of tax increases. He states that taxes are already set to rise, regardless of the election outcome. The foundation also suggests that additional tax increases are likely to occur after the election, as historical trends indicate.
In conclusion, both the IFS and the Resolution Foundation warn that the size of the state in the UK is set to remain larger than before the pandemic or financial crisis. The next government will face difficult decisions regarding public spending and will need to either cut spending or raise taxes. Tax increases are already part of government policy, and further rises are expected after the election. It is crucial for politicians to be transparent with the public about these realities and address the challenges ahead.
