Finances a ‘dark cloud’ hanging over election campaign, says IFS

A leading think tank has issued a stark warning about the financial challenges awaiting the next government.

The Institute for Fiscal Studies (IFS) says the state of public finances hangs over the election campaign “like a dark cloud”.

It warns more tax rises or cuts to public services could lie ahead.

It calls for an “open and robust” discussion about how all the parties will tackle these.

Both Labour and the Conservatives have committed to get debt falling as a share of national income. All the major parties would likely have a similar form of self-imposed rules in order to keep the government’s cost of borrowing from financial markets down.

But the independent IFS claims that high interest payments on existing debt and low expected economic growth could make reducing future debt more difficult to achieve, whoever is in government, than in any Parliament since at least the 1950s, without further measures.

To meet existing rules, the current chancellor had already pencilled in what could amount to potential cuts in funding for some public services – such as justice or higher education – of more than 10% in coming years, once population growth and inflation is taken into account.

Taxes are also on track to absorb a larger share of the nation’s income, up from 36.5% in the current tax year to 37.1% in 2028–29, in particular as the thresholds at which different rates of taxes on income apply are frozen, instead of rising with inflation as they have traditionally done.

As such, the IFS says that barring a dramatic improvement in growth, the next government could face three broad choices: to go forward with the spending squeeze for services, raise taxes further or increase annual borrowing, which could risk preventing total debt from falling.

Paul Johnson, director of the IFS, said: “Money is tight. We could get miraculously lucky with growth and escape having to make these tough choices. But we might not.

“Just because thousands of English and Scottish football fans are crossing their fingers and hoping for the best this summer doesn’t mean that the next cabinet should do the same.”

He added that the next government should not wait until it enters office to “open the books”, adding that they are published and available for anyone to inspect.

“We should use them as the basis for an open and robust discussion during the election campaign,” he added.

The IFS’s warning echoes one it made after the Budget in March, when it spoke of a “conspiracy of silence” that meant major parties were failing to acknowledge potential challenges, or spell out how it would tackle those.

All parties will be putting forward policies they say will make voters better off in coming weeks.

But with most economists coming to a similar conclusion as the IFS, such pledges will be made against a backdrop of constrained public finances – which may mean tough choices ahead that may ultimately impact voters’ fortunes.

Responding to the findings of the IFS, Darren Jones, shadow chief secretary to the Treasury, said that the Labour party was under no illusions about the scale of the challenge it may face.

“The country will only see the full scale of the challenge if we win the election. We have promised to deliver an immediate injection of cash into our public services and will then get to work to turn the country around,” he said.

The BBC has also approached the Conservatives for comment.