Tax Hikes Needed Whoever Wins UK Election, Analysis Shows

(Bloomberg) -- Neither Prime Minister Rishi Sunak nor his poll-leading Labour opponent Keir Starmer are fighting the UK election with a credible economic policy, and whoever wins will likely have to break their promises not to raise tax, according to analysis by Bloomberg Economics.

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Tax policy took center stage during the campaign this week, with Sunak controversially accusing Starmer of plotting to raise levies by £2,000 ($2,556.9) per household over the next five years during Tuesday night’s ITV debate between the two leaders. The Labour leader called that figure a “deliberate lie.”

Outside of that heated political argument, both the Conservatives and Labour are facing criticism from economists that they aren’t being upfront with voters about the state of the public finances and their respective policies on tax.

Both parties have ruled out raising income tax, the national insurance payroll tax or value-added tax, a sales levy, in an effort to convince voters they won’t be worse off. That leaves then struggling to explain how they would fund Britain’s ailing public services.

“The upshot is that tax rises will be needed to make the public finances sustainable,” said Dan Hanson and Ana Andrade of Bloomberg Economics. “The chances of the winner of the July 4 election having to row back on promises made on tax are high.”

That’s because the government’s current plans for departmental spending over the next Parliament “look undeliverable,” they said. Bloomberg Economics has estimated that further fiscal tightening of around £45 billion by 2028-9 will be required to meet the rule that debt as a share of GDP falls in the fifth year of forecasts — a stated aim of both parties.

After taking account of the likely paths of the day-to-day budgets of health, defense, education and foreign aid, remaining departmental budgets will need a boost of around £20 billion to keep pace with inflation, the analysis found.

“Promising to not raise income tax, value added tax, national insurance contributions and, in Labour’s case, corporation tax – which together account for about 66% of all tax revenue – might be good politics, particularly during an election campaign,” Hanson and Andrade said. “But with material risks currently hanging over the public finances, it isn’t a credible economic policy.”

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