UK cannot afford tax cuts or rise in spending, says IFS

An ill-timed package of fiscal loosening, such as unfunded pre-election tax cuts, could give a short "sugar rush" but ultimately lead to a protracted recession, according to new research by think tank the Institute for Fiscal Studies (IFS).

The UK economy remains stuck between weak growth on the one hand and the risk of persistently high inflation on the other.

Chancellor Jeremy Hunt — and whoever succeeds him after the next election — are in a "terrible bind," the IFS said in its Green Budget, funded by the Nuffield Foundation and produced in association with Citi.

While taxes are heading to their highest ever level, post-election spending plans are still extremely tight, the IFS said. Official figures show that as long as these plans are kept to, the UK will be heading for the biggest primary surplus — government revenues above non-interest spending — in a generation.

Hunt recently said that a tax cut in the autumn budget, which is set to be laid out on 22 November, is "unlikely".

Although the UK heads into campaigning months ahead of the next election, political parties on both sides of the floor are likely to make vote-winning promises.

Read more: UK predicted to avoid recession despite higher interest rates

Meanwhile the Bank of England has hinted it isn't done yet with high interest rates.

"For the [Monetary Policy Committee] (MPC), efforts to manage still meaningful risks around embedded inflation have to be increasingly weighed against the potential for a more protracted downturn — and in particular the risk to vulnerable private sector balance sheets," Benjamin Nabarro, chief UK economist at Citi, said.

"The lesson of the 1970s was to hold rates tight until you can see the 'whites in the eyes' of disinflation. In a highly financialised, debt-driven economy, that may turn out to be only half the story."

Part of the problem that the government faces now is the interest it has to pay on its debt, which is expected to settle at its highest sustained level since the mid 1980s — around £30bn above more recent levels.

Meanwhile, the growth outlook is poor. Debt as a fraction of national income is set to rise to, and then settle not far below, 100% of GDP.

"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," said Paul Johnson, director of the IFS.

Watch: Room for UK tax cut 'unlikely' in autumn statement: Hunt

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