UK Parties Accused of ‘Avoiding Reality’ Over Big Economic Risks
(Bloomberg) -- Both major UK political parties are refusing to address chronic problems in public services and looming economic risks as the election descends into big rows over small pledges, two of the country’s top think tanks warned.
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In comments made shortly before the first televised leaders’ debate of the campaign, the Institute for Fiscal Studies accused the ruling Conservatives and Labour opposition of “avoiding reality.” The Resolution Foundation said politicians “should have a plan that is credible given the far tougher fiscal climate they may well encounter in the next parliament, and the difficult choices it would bring.”
Prime Minister Rishi Sunak will go head-to-head with Labour leader Keir Starmer at 9 p.m. on ITV, when the economy, defense, migration and the state of the public services such as health and justice are likely to be hotly debated. Both parties are effectively signed up to the same fiscal rules, which leave them no room to maneuver unless they raise taxes or find other savings.
Resolution warned that the next government will inherit a £12 billion ($15.3 billion) hole in the public finances should even small economic risks crystallize. If deep cuts to public services planned for 2025 onwards are scrapped, £33 billion of savings would be needed. Real per-person day-to-day public service spending is 6% below 2009-10 levels and struggling smaller departments like transport are facing 19% cuts in a fresh round of austerity.
The Conservatives’ fiscal rule is to have debt falling as a share of national income in the fifth year of the forecast and keep annual borrowing below 3% of GDP. Labour has the same debt rule and would pay for all day-to-day spending out of revenues, only borrowing to invest.
In March, Tory Chancellor of the Exchequer Jeremy Hunt was judged by the Office for Budget Responsibility to be meeting his rule with £8.9 billion to spare. Labour plans to invest £23.7 billion over five years in green industries and will raise around £5 billion annually by taxing private school fees and private equity. The IFS said the opposition party would meet its debt target — “just.”
Both parties hope growth and interest rate cuts will come to the rescue but Isabel Stockton, senior research economist at IFS, said: “Anyone serious about government should not rely on getting lucky.”
Resolution warned that even small economic changes could blow the public finances off course. “A modest downward revision in the OBR’s forecast for productivity from 1.1% to 0.9% a year would add around £17 billion a year to borrowing by the end of the forecast period,” it said.
Compensation agreed by the government for the victims of infected blood products will cost £10 billion over the next five years. Should interest rates be one percentage points higher than forecast, it would add £12 billion a year to borrowing, Resolution added.
James Smith, research director at Resolution, said: “The state of the public finances has dominated the election campaign so far, with the inevitable arguments over how each spending pledge is funded. But this narrow focus risks distracting the electorate from the bigger question of how each party would manage the uncertainties facing the public finances.”
“The parties should explain how they would confront these challenges, as well as rightly making their case for an economic strategy that would boost growth.”
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