Weak economic growth could send the national debt climbing by £28bn and blow both Labour and the Tories’ fiscal targets, the Institute for Fiscal Studies has warned.
Rishi Sunak and Sir Keir Starmer have been urged to set out plans for how they would deal with a downturn in the economy, amid warnings that public finances are on a knife edge.
Both Labour and the Conservatives have made it their target to have the UK’s mountain of debt shrinking within five years, a key fiscal rule.
The IFS said current plans to meet this goal hinge on the economy growing by 1.5pc a year on average over the period, as projected by the Office for Budget Responsibility (OBR).
However, the OBR’s forecasts are more optimistic than many others and growth projections from the Bank of England would see debt rising by a margin of £28bn in 2028 to 2029, the IFS said.
Isabel Stockton from the IFS said both parties had committed to “the frankly rather daft target to get debt falling in the fifth year of the forecast period.”
She said: “While forecasts might improve – we might get lucky – they might also get worse. Given that there must be at least a 50:50 chance of such a deterioration, it really is incumbent on the parties to tell us how they would respond.”
Both Sir Keir and Mr Sunak earlier this week avoided answering whether they would preside over nearly £20bn of real terms cuts to public services, which are implied by current projections, when facing each other in a live TV debate.
Mark Franks from the Nuffield Foundation, which helped fund the IFS analysis, said: “There is no likely scenario where the next government will be able to simultaneously prevent making cuts to some public services, avoid tax increases and make significant inroads into cutting the national debt.”
While worse-than-expected growth risks growing the public debt pile, an acceleration in the economy could hand the new prime minister a windfall.
If growth rates recover to the averages seen in the 1990s, the next government could be handed an extra £30bn boost to the public coffers, the IFS said.
Such a windfall would wipe out any need for real terms cuts and even allow for cancelling £11bn-a-year tax rises pencilled in from frozen tax brackets.
Annual GDP growth was above 2pc for most of the 1990s and reached a high of 4.9pc in 1997.
However, barring the distortion of Covid, Britain has struggled to register growth consistently above 2pc for the last decade and the IFS said banking on such good fortunes would be foolish.
Under current projections, the next government will only meet the fiscal rules by a hair’s breadth.
There was only a £9bn buffer to meet the target when the last Budget was presented in March, and the economy has since performed slightly worse than expected.
Mr Franks said: “Even with a significant uptick in economic growth accompanied by budget cuts for unprotected departments, national debt would still be very high by recent historical standards at the end of the next parliament.”
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