Chancellor Jeremy Hunt should not make any tax cuts in the upcoming Budget until he has set out how the government would pay for them, according to the Institute for Fiscal Studies.
An IFS report, commissioned by the Economic and Social Research Council, found faster population growth as projected by the ONS could boost revenues but will also make it harder for the government to keep to existing spending plans.
Martin Mikloš, research economist at the IFS, believed Hunt may try to bank on the higher revenues that have come as a result of population growth to fund tax cuts in the Budget next week.
This is without taking into account the additional pressures a larger population will place on services and local government.
The report revealed maintaining real-terms spending on unprotected services would require a cash top-up of £20bn in 2028-29 while maintaining it in per-person terms would require an additional £25bn.
The IFS also warned government debt still remains a “big constraint” with debt interest expected to settle at 2 per cent of national income equating to £55bn a year in today’s terms.
Therefore, the IFS said without Hunt providing a detailed spending plan as part of a spending review, he should refrain from announcing any further tax cuts.
Mikloš, added: “He [Hunt] might even be tempted to cut back provisional spending plans for the next parliament further to create additional space for tax cuts. The chancellor should resist this temptation.”
Danni Hewson, head of financial analysis at AJ Bell, said cutting taxes would cut into the cash funding government staffing costs, benefit payments and overstretched public services like the NHS.
She added: “There's also the argument that cutting taxes and putting a little more into all of our pockets might rekindle those inflation embers and make central bankers more wary about cutting interest rates.
“The IMF warned that any fiscal headroom should be used to fix the roof whilst the sun shines, to replenish stretched budgets so that in the event of another geopolitical crisis the UK has enough left in the tank to fund policies like furlough or the energy price guarantee scheme.
"When you look at the debt to GDP ratio that argument certainly looks persuasive; up 1.8 per cent over the year to 96.5 per cent.
“And with the UK economy officially in recession confidence has taken a knock. Sector after sector has been lobbying for assistance, for a boost to help businesses stay on their feet.
“The chancellor is once again stuck on a high wire. With the weight expectation from so many parties pulling at his ankles, keeping his balance won’t be an easy task.”
This comes following reports from the Financial Times this month (February 15), that Hunt had warned colleagues not to expect big tax cuts in the Budget after receiving the OBR’s second pre-Budget figures.
