UK faces £33bn hole in finances or return to austerity, thinktank says | Government borrowing

Britain’s next government will need to fill a shortfall of up to £33bn in the public finances unless it is prepared to push through a fresh round of severe austerity measures, a thinktank has warned.

The Resolution Foundation said the debate between Labour and the Conservatives over the funding of specific pledges was “detached from reality”, with election promises based on cuts that would be hard to deliver.

The thinktank said both the main parties were committed to reducing debt as a share of national income within five years but higher interest payments on debts, slower-than-expected productivity growth and the £10bn cost of compensation for the infected blood scandal would make that more difficult.

The Office for Budget Responsibility, the Treasury’s tax and spending watchdog, has estimated that the government is on course to meet its debt-to-GDP target with just £9bn to spare, but the Resolution Foundation said the winning party in the general election would face the choice of raising taxes or cutting spending to meet its debt target.

The thinktank said if the next government stuck to current spending plans the size of the deficit was likely to be about £12bn, but if it chose to spare prisons, the police and local government from fresh cuts, it could be as big as £33bn. In its annual health check on the UK economy last month, the International Monetary Fund warned of a £30bn post-election hole.

James Smith, the Resolution Foundation’s research director, said: “The state of the public finances has dominated the election campaign so far, with the inevitable arguments over how each spending pledge is funded. But this narrow focus risks distracting the electorate from the bigger question of how each party would manage the uncertainties facing the public finances.

“This question is crucial, as whoever wins the election could be confronting a fiscal hole of £12bn, if today’s uncertainties turn into bad news after the election. And if the next government wants to avoid a fresh round of austerity, that black hole could rise to over £33bn.”

The budgets for NHS England, education, defence and the Foreign, Commonwealth and Development Office are ringfenced, but this would result in inflation-adjusted, per-person spending cuts to unprotected departments – such as justice, the Home Office and local government – of 13% between 2024-25 and 2028-29. Cuts on this scale – equivalent to £19bn – would amount to repeating nearly three-quarters of the cuts made during the 2010-2015 parliament.

“Delivering these cuts in the face of already crumbling public services and the public desire for more, not less, spending on public services would likely prove very challenging,” the Resolution Foundation said.

While the stated aim of both parties was to get debt falling, the next government could be on course to miss this target by more than £30bn. History and politics had left the fiscal debate “detached from this reality”, it added.