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The government will head into the next election with a black hole in public finances almost three times larger than when Boris Johnson came to power, a leading think tank warned.
The Institute for Fiscal Studies said the scale of the Covid recession and Britain’s slow economic recovery would inflict lasting damage on the treasury, making loans £ 100bn higher by election time in 2024. than anticipated before the pandemic.
In more pessimistic scenarios, with the effects of Covid-19 for longer, the think tank said that the government deficit, the gap between spending and tax revenue, could exceed £ 200 billion in that year.
That debt figure would easily exceed the scale of the deficit inflicted by the 2008 financial crisis, which was used by conservatives as the basis for toppling Gordon Brown’s Labor government in the 2010 election.
Setting the stage for a delicate economic backdrop for the Conservative campaign to win a fifth consecutive term in office, the IFS said the government would likely need to make “tough decisions” about whether to raise taxes or cut spending if it wanted to cut taxes. loans. levels.
He said the budget deficit would remain at around £ 151bn in 2024-25, almost three times higher than the £ 58bn forecast before the pandemic, as the fallout from the crisis leaves lasting scars on the economy. .
As government spending rises in response to the pandemic and tax revenue falls during the deepest recession on record, the IFS said this year’s public lending would reach 350 billion pounds, the highest number of loans ever. times of peace since the 18th century.
Yet despite the record rise in indebtedness that pushed the national debt, the sum total of each budget deficit, to the highest levels since the 1960s, warned the government against imposing a new austerity campaign or the increase in tax levels in the short term.
In a warning to Chancellor Rishi Sunak, the IFS said the government’s policy should focus on supporting the economy “almost independently” of the short-term consequences of the budget deficit for the next 18 months at least.
Despite the national debt exceeding £ 2 trillion, more than 100% of national income, the IFS said the cost of borrowing had also fallen to its lowest levels since the founding of the Bank of England in the decade of 1690.
He also said that the scale of the national debt remained low relative to earlier periods in history and was comparable to other advanced economies, including the United States and France.
Some economists and the International Monetary Fund have told governments not to worry about higher debt levels, as borrowing costs have plummeted and inflation remains low.
However, the IFS said that an increase in borrowing costs could, if not accompanied by stronger growth, prove “enormously problematic” for public finances because debt payments would absorb a larger share of public spending.
He said it would take at least £ 40bn in tax increases or spending cuts in 2024-25 to keep the national debt at roughly 100% of GDP, let alone bring debt back to pre-pandemic levels.
Paul Johnson, IFS Director, said: “For now, with extremely low borrowing costs, Mr. Sunak should not be unduly concerned about the accumulation of debt as a result. It is necessary. Well-targeted investment spending over the next period could help with growth and, consequently, over time, fiscal numbers.
“Unfortunately, none of this will be enough to protect the economy in the medium term. We are heading for a significantly smaller economy than expected before Covid, and probably higher spending as well. If no action is taken, debt, already at its highest in more than half a century, will continue to grow. Tax increases, and big ones, seem almost inevitable, though probably not until the middle of this decade. “
