Tax rises hard to avoid over next five years, says IFS

The UK’s main political parties have “ducked” addressing stark choices over public finances in their manifestos and it will be a “considerable surprise” if taxes are not increased over the next five years, a leading think tank has warned.

The Institute for Fiscal Studies (IFS) accused Labour and the Conservatives of engaging in a “conspiracy of silence” and ignoring “painful choices”.

It said the UK has the highest debt level for more than 60 years, taxes are near a record high and spending has swelled – but public services are “visibly struggling”.

While the government is paying huge interest on debts and welfare bills have grown, spending on health is likely to rise because of an ageing population while defence funding will have to increase.

Meanwhile, economic growth is subdued.

Paul Johnson, director of the IFS, said: “These raw facts are largely ignored by the two main parties in their manifestos.”

He said that “huge decisions over the size and shape of the state will need to be taken, that those decisions will, in all likelihood, mean either higher taxes or worse public services”.

Whoever wins the election in less than a fortnight faces a “trilemma”, said the IFS.

“Raise taxes by more than they have told us in their manifesto. Or implement cuts to some areas of spending. Or borrow more and be content for debt to rise for longer,” it said.

“What will they choose? The manifestos have left us guessing.”

Mr Johnson also criticised both Labour and the Conservative Party for ruling out increases to income tax, National Insurance and VAT.

“Despite a damaging rush to rule out increases in all sorts of tax rates, it will be a considerable surprise if no other taxes are increased over the next five years,” he said.

In response to the IFS analysis, Prime Minister Rishi Sunak said: “We have a fully costed manifesto which can deliver tax cuts for people at every stage in their lives.

“That is largely funded by making sure that we can find some savings in the growth of the welfare budget because it has been growing at unsustainable levels since the pandemic.”

Labour leader Sir Keir Starmer said: “The economy has flatlined for 14 years and that is exactly what we are wanting to change and that’s why we have set out plans for growth in our manifesto.”

The Lib Dems insisted the plan set out in its manifesto was “fully costed”.

A spokesperson said it would allow the party “to invest in our public services and rescue our NHS, funded by asking big banks and billionaires to pay their fair share”.

The IFS condemned a lack of transparency over plans to keep thresholds on income tax frozen for a further three years, which will raise £10bn a year.

The Tories, Labour and the Liberal Democrats would keep the measure in place.

The IFS also questioned if parties could raise £5bn by “cracking down” on tax evasion and avoidance.

“Maybe,” said Mr Johnson, but he added that none of the manifestos “make much of the fact that on official estimates most of the shortfall in what HMRC collects is not from big, faceless conglomerates but from the self-employed and small businesses”.

The think tank also examined manifestos from the Green Party and Reform.

It said the Green Party had outlined major spending plans which would be paid for by tax rises and an additional £80bn a year in borrowing.

Reform would cut taxes by £90bn and increase spending by £50bn, the IFS said, which would be “paid for” by an unspecified £150bn package of measures such as cutting welfare and “government waste”.

Mr Johnson said the policies the Greens and Reform outlined in their manifestos were not going to be implemented.

“But the way they suggest that they have radical ideas which can realistically make a positive difference, when in fact what they propose is wholly unattainable, helps to poison the entire political debate,” he said.

The Green Party refuted the IFS’s suggestion that “our proposal to tax wealth fairly to generate the money to mend our broken public services is unattainable”.

A spokesperson said its proposal was to transform the UK economy to be like European countries “where tax is much higher as a proportion of GDP and the government plays a stronger, more interventionist role in the economy”.

Reform has been contacted for comment.

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