NIESR Press Release: Political parties likely to break fiscal rules without tax rises
*FOR IMMEDIATE RELEASE*
None of the political parties has said in their manifesto how they will deal with foreseeable risks to the economic outlook such as Brexit and the costs of an ageing population that will put significant pressure on the public finances and could force them to break their fiscal rules, according to election briefings by the National Institute of Social and Economic Research.
Against such a background of uncertainty, future governments will need to be ready to react to unfavourable fiscal developments that are likely to mean raising taxes. Political parties should avoid pledging not to raise taxes in the next Parliament as such a promise is not robust to the possible circumstances that may arise.
“The fiscal outlook has weakened since the last forecast by the Office for Budget Responsibility in March,” said Garry Young, Director of Macroeconomic Modelling and Forecasting at NIESR. “We see no headroom for extra spending or reduced taxes within the existing settlement. This means that all parties could breach their fiscal rules in the next parliament if they do not change their plans. Political parties should avoid pledging not to raise taxes in the next Parliament as such a promise is not robust to the possible circumstances that may arise.”
“Fiscal policy is frankly in disarray following the successive changes in fiscal rules by both main political parties,” said Jagjit S. Chadha, Director of the NIESR. “Rather than change the target every few years simply to avoid being accused dubbed as useless for failing to meet them, the next government must acknowledge the targets need to be adapted as fresh challenges arise, that they must be set in manner that is not subject to the political cycle, and that they are overseen by an independent Fiscal Council with the power to judge the appropriate stance of fiscal policy.”
- There are material differences between the parties’ plans, but none imply levels of spending or taxation outside of previous UK historical experience.
- All parties stress the importance of limiting borrowing to pay for investment. In all cases overall borrowing is expected to increase from current levels.
- The fiscal outlook is very uncertain with known risks associated with Brexit and demographic change. This means that promises not to raise taxation are not credible and unhelpful.
- An ageing population will require more resources for both the NHS and social care. Some consideration should be given to building in rising long-term taxes to pay for long-term higher spending.
- NIESR has calculated that compared with remaining in the EU, leaving the EU on the terms of the Prime Minister’s deal will result in tax revenue being lower by about £10 billion per year in the next Parliament and by about £30 billion by 2030.
- The promise by the Labour Party to compensate women born in the 1950s whose pension age was raised in 1995 and again in 2011 is estimated to have added £58 billion to Labour’s planned spending in the next Parliament to the additional spending already announced in the manifesto.
- There should be more consideration of long-term fiscal challenges and how the public might be prepared for dealing with them.
Notes for editors:
This full General Election Briefing on ‘Where is the Money Coming From?’ can be found here.
The full General Election Briefing on ‘The Fiscal Rules’ can be found here.
NIESR’s microsite containing briefings, podcasts and vodcasts on the General Election can be found here.
This briefing is supported by the Nuffield Foundation.
For further information or to arrange interviews, please contact the NIESR Press Office: Phil Thornton on 0207 654 1923/ p.thornton [at] niesr.ac.uk or Luca Pieri on 0207 654 1931/ l.pieri [at] niesr.ac.uk