Labour faces £33bn blackhole if it maintains state spending, research suggests
The next government could face a £33bn blackhole if it wants to maintain per person spending without raising taxes, new research suggests, in yet another indication of the difficult fiscal situation Rachel Reeves is likely to inherit if Labour wins the election.
With Labour looking very likely to form the next government, the Resolution Foundation warned that the party would face very difficult choices if it wants to meet its fiscal rules. These rules require the government to get debt on a downward path in five years time.
New forecasts from the Office for Budget Responsibility (OBR) will be published alongside the next government’s first fiscal event. These forecasts could blow a hole in the government’s fiscal plans.
The OBR currently forecasts annual productivity growth of 1.1 per cent, significantly above its post-financial crisis average. Figures out last month showed that productivity only increased 0.1 per cent in the first quarter of this year, meaning the OBR’s forecasts could be revised.
The Resolution Foundation noted that even a “relatively modest” revision to annual productivity growth, from 1.1 per cent to 0.9 per cent, would add £17bn to borrowing by the end of the forecast period.
The next government will also be under a lot of pressure to top up budgets at unprotected departments – such as justice and transport – which are facing deep cuts after the election.
Many economists, including those at the International Monetary Fund (IMF), have warned these tight spending plans are unrealistic given the strain on public services.
The Resolution Foundation said that maintaining per person funding in these departments would leave the government facing a £33bn blackhole.
James Smith, research director at the think tank, said both parties needed to explain how they would manage the “uncertainties” facing the public finances.
“The parties should explain how they would confront these challenges, as well as rightly making their case for an economic strategy that would boost growth,” he added.
Separate research from the Institute for Fiscal Studies (IFS) showed that Labour’s pledge to invest £23.7bn in green projects over the next parliament will make it more difficult to meet the main fiscal rule.
Under the OBR’s March forecasts, Labour could have gone through with its green spending plans while still meeting the debt rule, but Isabel Stockton, a senior research economist at IFS, warned they might not be so lucky come the autumn.
“On the basis of the March Budget forecasts and the sharp spending cuts they imply, it looks as though it will be just about consistent with the fiscal rule,” Stockton said.
“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”.