Labour and Tories ‘avoiding reality’ of sharp spending cuts after general election, says think-tank

The Institute for Fiscal Studies (IFS) criticised the current fiscal rules which are ‘arbitrary and gameable’

Tax hikes or spending cuts would be needed for the Government to end public sector pay disputes and crippling strike action despite the UK being on course to borrow more than £30 billion less than forecast this year, according to a report (Aaron Chown/PA) (PA Wire)

Labour and the Conservatives are “avoiding the reality” that their economic plans will mean they will have to enact “sharp” spending cuts after the general election, a leading economic think tank has warned.

In an analysis published on Tuesday, The Institute for Fiscal Studies (IFS) said neither of the main parties appeared “serious about the underlying principle of getting debt falling”.

Both main parties are committed to meeting the fiscal rule of getting debt on a downward path between 2028/29 and 2029/30. However the IFS forecasts say that the future chancellor will be “fortunate” to meet this aim.

The think-tank criticised the current fiscal rules which are “arbitrary and gameable” and that it was a “poor guide to the health of the public finances”.

While Labour is committed to the overall debt rule, the party is proposing to change the “supplementary” fiscal target in the future to focus on the current balance of borrowing and spending, rather than overall borrowing.

The IFS said this would mean revenues would cover day-to-day spending, but would allow borrowing to invest.

It added: “There are good arguments for treating day-to-day and investment spending differently, and similar targets were in place from 1997 to 2015 under both Conservative and Labour chancellors.”

But the overall, currently binding debt rule did not make a distinction between investment and day-to-day spending, meaning Labour’s plan to borrow £23.7 billion to increase investment in supporting the transition to net zero would make it more difficult to stick within the rule.

IFS analysis shows that under the March Budget, forecasts suggest Labour could instigate the extra borrowing without missing the debt target.

But it is not possible to conclude this will be possible at the time of a post-election autumn fiscal event, which will be accompanied by a new set of forecasts and other “moving parts” and external economic factors, the IFS said.

Isabel Stockton, senior research economist at IFS, described the fiscal rule as having “an unfortunate combination of characteristics”.

She added: “It is eminently gameable - and has already been gamed almost to irrelevance by the current government; it is the loosest debt rule we have had in the past 30 years; and yet it is currently so constraining that it will either be breached, or will result in policies in practice quite different to those currently being peddled.

“It is, to be kind, not a sensible rule, and neither party appears serious about the underlying principle of getting debt falling.

“This has led to both parties avoiding the reality that they are effectively signed up to sharp spending cuts, while arguing over smaller changes to taxes and spending.”

Commenting on March forecasts suggesting Labour’s plan for net-zero investment could narrowly fall within the fiscal rule, Ms Stockton added: “If that remains the case come the autumn, then whoever is chancellor by then will be able to consider themselves fortunate. Labour, or anyone serious about government, should not rely on getting lucky.”