General election campaign ignoring looming £12bn public finances hole

With less than a month to go before the UK general elections, parties have been busy making pledges and fighting over how they will fund it. However, a think tank has warned that rows over small pledges risk missing wider uncertainties that could leave the next government confronting a £12bn black hole in the public finances.

Some additional costs include compensation for the victims of infected blood products, which totals £10bn over the next five years.

An even bigger uncertainty surrounds possible changes to the Office for Budget Responsibility’s (OBR) forecast for future productivity growth. The think tank said that even a “relatively modest” downward revision in the OBR) forecast from 1.1% to 0.9% would add around £17bn a year to borrowing by the end of the forecast period.

Current plans have just £9bn of headroom against the binding fiscal rule of having debt falling by the fifth year of the forecast.

The combined impact of all these fiscal-forecast factors would be enough to put underlying public-sector net debt on a rising path, with debt rising as a proportion of GDP by £12bn, breaking both main parties’ commitments to have debt falling as a share of national income in the final year of the forecast.

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Furthermore, the think tank warns that the £19bn of cuts to unprotected departmental spending – from prisons to local government – pencilled in for after the election, will be “extremely challenging to deliver” given the current state of public services.

“The share of crime victims not satisfied with the police has risen from three-in-ten in 2010 to four-in-ten today, while dissatisfaction with the performance of local councils has risen by a third over the past decade,” the Resolution Foundation said.

Avoiding these cuts by maintaining public spending in real, per-person terms, along with £4bn of extra spending on asylum claims, currently being funded out of HM Treasury’s reserves, could increase the size of the fiscal black hole to around £33bn.

“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,” James Smith, research director at the Resolution Foundation, said.

“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.

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“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.”

Meanwhile, the Institute for Fiscal Studies (IFS) said neither of the main parties appeared “serious about the underlying principle of getting debt falling”.

In its assessment of campaigning, the IFS said forecasts suggest whoever is the chancellor in the autumn will be “fortunate” to meet the fiscal rule of getting debt on a downward path between 2028/29 and 2029/30, which both Labour and the Conservatives have committed to.

The think tank added that while there are “good reasons” to want debt falling over the medium-term, it described the current “fiscal mandate” as “arbitrary and gameable”.

This makes it a “poor guide to the health of the public finances”, the IFS said.

Isabel Stockton, senior research economist at IFS, described the fiscal rule as having “an unfortunate combination of characteristics”.

“This has led to both parties avoiding the reality that they are effectively signed up to sharp spending cuts, while arguing over smaller changes to taxes and spending," she added.

The UK is holding a general election on 4 July.

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