Tories warned 'sugar rush' of tax cuts before election will fuel recession risk

16 October 2023 , 23:01

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Chancellor Jeremy Hunt will set out his tax and spending plans in the Autumn Statement next month (Image: PA)

The Government is in a “terrible bind” - whoever wins the next election, a leading think tank has warned.

The Institute for Fiscal Studies says weak economic growth and stubbornly high inflation leave “no room” for unfunded tax cuts or spending increases any time soon. One issue is the amount the government is shelling out on interest payments on the nation’s debt mountain, which stood at nearly £2.6trillion at the end of August.

The IFS’s sobering assessment comes as Chancellor Jeremy Hunt prepares to announce his Autumn Statement next month. It warned unfunded tax cuts ahead of the next election could create a “short-term economic sugar rush”.

But this risked fuelling the chances of a recession if the Bank of England has to hike interest rates further to stem inflation, the IFS said. It added: “The Chancellor is in a terrible bind, as will be whoever is Chancellor after the general election.”

Publishing its Green Budget today, the IFS said that on one hand the amount the Treasury is collecting in taxes has reached a record high, with government borrowing below the Office for Budget Responsibility’s forecast in March. But it warned the government’s debt interest spending was on track to reach the highest level since the 1980s, and around £30billion above levels the country is used to.

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“That’s £30 billion each year that can’t be put to better use,” it said. While the nation’s debt is expected rise, the economy is forecast to be stuck with feeble growth. That, in turn, is set to curtail government spending plans.

“With commitments on health, defence and childcare, among others, this would imply cuts to most public service spending,” the IFS said. Today’s report was produced in association with the bank Citi, which forecast the UK would experience a “moderate” recession in the first half of next year.

Paul Johnson, director of the IFS, said the country was in a “horrible fiscal bind.” He added: “The price of our high levels of indebtedness, failure to stimulate growth, and high borrowing costs is likely to be a protracted period of high taxes and tight spending.”

Graham Hiscott