The next government will need to raise taxes to maintain the existing provision of public services, according to the National Institute of Economic and Social Research.
The think tank published its quarterly UK economic outlook which said there was no fiscal headroom for any further tax cuts because the government’s current spending plans “did not meet their self imposed fiscal rules”.
It also said it does not expect a rate cut from the Bank of England until at least August and only anticipates two cuts by the end of 2024, with a further two in 2025.
Professor Stephen Millard, deputy director of macroeconomic modelling and forecasting, said: “Despite the welcome fall in inflation, UK growth remains anaemic. This will make it difficult for any incoming government to carry out the much-needed investment in infrastructure and the green transition, as well as increase spending on public services and defence, without either raising taxes or rewriting the fiscal rules.
“This makes clear the need to reform the fiscal framework to enable the government to do what is needed for the economy in a fiscally sustainable way.”
The NIESR also forecasted GDP will grow by 0.4 per cent in the first quarter of 2024 and 0.8 per cent relative to 2023.
Latest figures from the ONS revealed the UK economy grew by 0.1 per cent in February 2024, following a 0.2 per cent rise in January 2024 indicating the UK’s period of technical recession may be short-lived.
The think tank also revealed that targeted policies have helped the hardest hit households the most, while the recent tax cuts have been “regressive”.
While the 4p cut to NI benefited the high-income households “disproportionately”.
Professor Adrian Pabst, deputy director for public policy, said: “While real wages are rising, households in the bottom half of the income distribution continue to feel the impact from the cost-of-living crisis, with housing costs wiping out the benefits from higher real wages.
“Similarly, the freezing of the personal allowance and tax bands is making low and middle income households worse off despite the cut to national insurance contributions. Despite some efforts, regional inequalities are persistent and, in some cases, getting worse.
“Besides more targeted policies on skills, housing and transport, the country also needs more at-scale investment to regenerate the regions and close the gap with top-performing areas. The current operating frameworks for fiscal and monetary policy will not suffice in getting the economy going and addressing the scars in UK society.”
alina.khan@ft.com
