UK election winner should scrap debt cut target, think tank says

FILE PHOTO: British Finance Minister Hunt leaves Downing Street in London

By William Schomberg

LONDON (Reuters) - The winner of Britain's election this year needs to scrap budget rules that are holding back economic growth and cannot be met without higher taxes, a leading think-tank said on Thursday.

Prime Minister Rishi Sunak and his finance minister Jeremy Hunt are following a self-imposed target of having public debt falling as a share of gross domestic product by 2028-29.

The opposition Labour Party, which is far ahead in opinion polls, says it will keep this rule to demonstrate its grip on the public finances.

But the National Institute of Economic and Social Research said the target is constraining public investment that is key for long-term growth and fixing inequality problems.

NIESR Deputy Director Stephen Millard said economic growth was likely to get stuck at around 1% a year.

That would make it hard for Britain to invest in infrastructure and the net-zero transition - plus increase spending on strained public services - without raising taxes or making the fiscal rules more flexible, he said.

NIESR projected that public sector debt, including the Bank of England's bond holdings, was on course to keep rising and reach 102.2% of GDP in five years' time.

"It's the targets that are forcing governments to put brakes on the economy," Millard said. "But of course, you can't just spend and spend and spend. You need to justify why you're doing it and you need to show that the money will come back in the end."

Financial markets would not balk if the case for borrowing to fund future growth was well made by future British finance ministers, Millard said.

Britain's bond market was sent into a tailspin in 2022 by the plans for sweeping tax cuts announced during the brief term of former Prime Minister Liz Truss.

NIESR said tax cuts should be aimed more narrowly at low-income households after richer households also benefited from support to offset the 2022 energy price surge and cuts to social security contributions.

NIESR said Britain's economy would grow by 0.8% in 2024, down slightly from a previous forecast made in February of 0.9%.

The Bank of England was likely to start cutting interest rates in August with only one more reduction likely in 2024 and further two in 2025 as the central bank moves cautiously in the face of inflation risks, the think tank said.

(Writing by William Schomberg; Editing by Toby Chopra)