The combination of a new tax year and the government’s forecast horizon rolled forward could add an estimated £12bn to Jeremy Hunt’s fiscal ‘headroom’, the IFS has revealed.
The IFS said this boost could allow for a third 2p cut to national insurance in a pre-election fiscal event but warned this should not be the basis for immediate and permanent tax cuts.
It called the boost to the chancellor’s ‘headroom’ a “quirk of a poorly designed fiscal rule”.
“Especially when the government’s adherence to its fiscal mandate is predicated on large, unspecified spending cuts in the next parliament,” it added.
The IFS estimates the next chancellor will inherit a forecast with a budget deficit of around £40bn in 2029-30, low enough to have government debt falling as a share of national income in that year.
However, this is predicated on the next government overseeing significant tax rises, allowing fuel duties to rise with inflation, cutting investment spending and delivering a return to austerity for many public services, according to the IFS.
Personal tax thresholds are due to remain frozen until March 2028 however the IFS has calculated unfreezing them would reduce revenues by £11bn in 2029-30.
Current policy plans imply real-terms cuts to public investment of 2.6 per cent per year over the next parliament, but the IFS has said avoiding those would require increasing spending by £18bn in 2029-30.
The IFS warned deviating from current policy on the above would be enough to mean debt is no longer meaningfully falling as a share of national income in 2029-30 but merely stable.
Helen Miller, deputy director at IFS, said: “Just by virtue of moving into a new tax year, Jeremy Hunt’s debt target has become easier to meet. The rolling forward of the forecast, coupled with a one year extension of the planned post-election spending squeeze, could add £12bn to his so-called ‘headroom’.
“This is a quirk of a poorly designed fiscal rule. It is not a sensible basis for more pre-election tax cuts. And it should not distract from the serious fiscal challenges facing the UK and the smorgasbord of difficult tax and spending choices awaiting the post-election chancellor.
“The next government’s choices will determine the size and role of the state, the distribution of resources between different households, generations and regions and the long-term sustainability of the public finances, these are the issues that deserve attention and debate.”
To illustrate the key trade-offs and show the scale of the fiscal challenge ahead for the next chancellor, IFS researchers in partnership with Nesta, have developed an interactive tool that allows someone to ‘be the chancellor’.
Ravi Gurumurthy, chief executive of Nesta, said: “Those who argue for tax cuts are often in denial that this requires more austerity. Advocates of higher spending are sometimes reluctant to say which taxes will need to increase. We ought to have a transparent debate on how we deal with an ageing society, the net zero transition and national security threats.
“This tool allows us to see the choices we face, and the difference they make. It ought to be the basis for comparing the plans of the major parties at the next election and coming up with our own.”
alina.khan@ft.com
