Worst debt burden since 1950s will mean higher taxes, warns IFS

MILLIONS of households face steep tax rises after the next election as the country grapples with the most challenging debt burden since the 1950s, according to a leading think tank.

The Institute for Fiscal Studies (IFS) said that Labour and the Tories face the most difficult tax and spending choices since the Covid pandemic and financial crisis because of spiralling debt costs and a “miserable” growth outlook.

It added that families face more “pain” to get to net zero as pressure mounts to switch to heat pumps and expensive electric vehicles to ensure that the UK meets green targets. “The post-election Chancellor’s economic and fiscal inheritance will be miserable,” the IFS said.

Jeremy Hunt has signalled he will use the March 6 budget to deliver a significant pre-election giveaway that some economists have estimated could be worth up to £20bn. But the IFS warned that tax cuts announced by the current Chancellor ahead of the election risk being followed by steep tax rises in the next parliament owing to the pressures of an ageing and sicker population.

The think tank also suggested that a planned public spending squeeze in the next parliament may be undeliverable. It came as Treasury mandarins dismissed allegations from the budget watchdog that the Government’s spending assumptions were “a work of fiction” owing to a lack of detail.

Richard Hughes, chairman of the Office for Budget Responsibility (OBR), complained to MPS on Tuesday that “the government hasn’t even bothered to write down what its departmental spending plans are underpinning the plans for public services”.

The OBR has warned that current spending plans, including increases in budgets for the NHS and defence, imply the UK is on course for a £20bn funding cut in non-protected areas. But speaking in front of the Treasury select committee yesterday, James Bowler, permanent secretary to the Treasury, said ministers had provided spending plans up until April 2025. “That’s no different to how it’s ever been since the inception of the OBR,” he said.

Rishi Sunak, the Prime Minister, and Sir Keir Starmer, the Labour leader, have both pledged to get debt down as a share of the economy. But the IFS said achieving this would be the most difficult in decades because of a toxic combination of high interest costs and low economic growth.

Britain’s debt pile is almost equal to the size of the economy at 97.7pc of GDP. While it surged above 200pc during the Second World War, strong growth in the decades following the war helped to rapidly reduce Britain’s debt share.

The IFS said: “The challenge is that with higher levels of spending on debt interest and forecasts suggesting that economic growth will continue to be weak, getting debt falling will be much more difficult than in the recent past – and arguably more difficult than at any point in the post-war period. As a result, there will be limited scope to cut taxes or increase spending by a meaningful amount while staying within that constraint. For a Chancellor with a goal of reducing debt as a fraction of national income, things have arguably never been so bad.”

It came as a closely watched survey warned that chaos in the Red Sea had reignited inflation at British factories.

Shipping delays and higher freight charges owing to diversions around the Suez Canal in January drove the steepest rise in manufacturers’ input costs since Aug 2023, according to the S&P Global Flash UK purchasing managers’ index (PMI). The composite PMI index rose from 52.1 in December to 52.5.