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Expert IFS Economist Paul Johnson on How the Election Will Impact Our Finances

A leading think tank has issued a stark warning regarding the financial landscape awaiting the next government. According to the Institute for Fiscal Studies (IFS), the state of public finances looms over the election campaign “like a dark cloud”. It cautions that future tax increases or cuts to public services may be inevitable. The IFS calls for an “open and robust” discussion among all parties on how to address these challenges.

Both Labour and the Conservatives have committed to reducing debt as a share of national income, with each likely imposing similar fiscal rules to maintain favorable borrowing costs. However, the IFS, an independent body, contends that high interest payments on existing debt and anticipated low economic growth could make debt reduction exceptionally challenging for any incoming government, surpassing the difficulties faced by previous Parliaments since at least the 1950s.

To comply with current rules, the current chancellor has already planned potential cuts to funding for certain public services—such as justice or higher education—of over 10% in the coming years, adjusting for population growth and inflation. Taxes are also projected to consume a larger portion of national income, increasing from 36.5% in the current tax year to 37.1% by 2028–29. This is due in part to frozen income tax thresholds, which traditionally rise with inflation.

Therefore, absent significant economic improvement, the next government could confront three primary options: proceeding with service funding reductions, further tax hikes, or increased annual borrowing, potentially stalling overall debt reduction.

Paul Johnson, director of the IFS, emphasized the urgency of the situation: “Money is tight. While we might be fortunate with economic growth, there are no guarantees. Hope alone is not a strategy.”

Johnson urged the next government not to delay in addressing these challenges, emphasizing that financial data are readily available for scrutiny. He stressed the importance of an informed public debate during the election campaign.

The IFS’s cautionary message mirrors concerns raised earlier this year after the Budget, highlighting a perceived “conspiracy of silence” among major parties regarding fiscal challenges and proposed solutions.

In response to the IFS report, Darren Jones, shadow chief secretary to the Treasury, acknowledged the scale of the task ahead for the Labour party if elected, pledging immediate investment in public services while working towards economic recovery.

The IFS’s findings underscore a prevailing consensus among economists that promises of improved public fortunes by political parties must contend with a constrained fiscal environment, potentially necessitating difficult decisions ahead.

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