The next government will be compelled to hike taxes to sustain current public service levels, a leading think tank’s analysis has revealed.
The National Institute of Economic and Social Research (NIESR) warns that there is “essentially no fiscal headroom for any further tax cuts” in the face of sluggish economic growth and subsiding inflation.
After grappling with soaring interest rates and the Bank of England’s rate hikes aimed at curbing rampant inflation, the UK economy saw a meagre 0.1 percent growth in 2023.
In its recent economic outlook, NIESR projects that GDP (gross domestic product) will have expanded by 0.4 percent in the first quarter of 2024 and anticipates a 0.8 percent increase for the entire year, albeit this is a modest uplift from 2023.
However, the institute has described this as an “anaemic UK GDP growth trend”.
This assessment arrives just one week after the Organisation for Economic Co-operation and Development (OECD) downgraded the UK’s economic growth forecasts for the coming two years, indicating it could lag behind its G7 peers in 2024.
Stephen Millard, NIESR’s deputy director for macroeconomic modelling and forecasting, commented: “Despite the welcome fall in inflation, UK growth remains anaemic.”
“This will make it difficult for any incoming government to carry out the much-needed investment in infrastructure and the green transition, as well as increase spending on public services and defence, without either raising taxes or rewriting the fiscal rules.”
“This makes clear the need to reform the fiscal framework to enable the government to do what is needed for the economy in a fiscally sustainable way.”
The next UK general election is widely expected to take place in the latter half of 2024. Earlier this week, Labour Party shadow chancellor Rachel Reeves stated that they plan to contest the next election based on the state of the economy.
In its report, NIESR also predicted an interest rate cut from the current level of 5.25 percent in August, with two cuts factored in for this year.
The forecasts also suggested that average living standards are set to improve by around six percent in 2024/25 compared to the previous year, but highlighted significant variations across income distribution.
The poorest tenth of households will see a two percent decline in disposable income, while households in deciles four to nine will experience a seven to eight percent improvement.
Adrian Pabst, NIESR deputy director for public policy, commented: “While real wages are rising, households in the bottom half of the income distribution continue to feel the impact from the cost-of-living crisis, with housing costs wiping out the benefits from higher real wages.”
“Similarly, the freezing of the personal allowance and tax bands is making low and middle-income households worse off despite the cut to National Insurance Contributions.”
“Despite some efforts, regional inequalities are persistent and, in some cases, getting worse.”
