Further tax hikes are likely to be necessary, says Axa Investment Managers, despite both the Conservatives and Labour party ruling out increasing income tax, national insurance and VAT as part of their election pledges.
Government borrowing overshot the Office for Budget Responsibility’s March forecasts by £7.3 billion in 2023/24, with April spending also exceeding the OBR’s projection as the National Insurance cut and benefit increases kicked in.
In addition, the infected blood scandal looks set to cost the government an additional £10 billion at a time when public finances are already stretched.
Gabriella Dickens, G7 economist at AXA Investment Managers, said: “Any incoming government will have the same constraints given that the major parties have committed to maintaining the current fiscal rules, which include both debt falling as a share of GDP and public sector borrowing not exceeding 3% in five years’ time. Currently, sharp spending cuts are needed over the forecast period to remain within the fiscal rules without any major boost to growth.”
The Institute for Fiscal Studies estimates that unprotected departments, including HMRC and the criminal justice system, face cuts in the region of £10 billion to £20 billion.
However, Dickens said it is unlikely that a Labour government, which maintains a lead of around 11 points in the polls, making a Labour majority look like the most likely outcome, would want to push through these cuts in full given its commitment to improve public services.
Both parties have already committed to keeping income tax thresholds frozen for the next three years, but Dickens said there is a “strong case” for further fiscal adjustments with taxes, most likely having to rise at some point over the next parliament.
“The question is when and what,” says Dickens. “We continue to think that a Labour government with a comfortable majority would push through temporary fiscal tightening to allow for affordable fiscal loosening after further repair to the public finances in time for the next election.
“However, a Conservative government would probably hold off for as long as possible, given the rhetoric around lowering the tax burden,” she added.
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