The government will go to the next election with a black hole in public finance that is almost three times larger than when Boris Johnson came to power, a leading think tank warned.
The Institute for Finance said the scale of the Covid recession and the UK’s slow economic recovery will continue to damage the governor, with about $100 billion more borrowing at the time of the 2024 election than expected before the epidemic hit.
In a more pessimistic scenario, as the impact of Corona 19 lasts longer, the think tank said the government said the gap between spending and tax income could exceed 200 billion that year.
These borrowing figures will easily surpass the size of the 2008 financial crisis deficit that Torries used as a basis for dismantling the Gordon Browns Labor Party government in the 2010 election.
The IFS says the government will have to make tough decisions about whether to raise taxes or reduce spending if it wants to lower lending levels in order to create a delicate economic background for the Conservative Party campaign to take power for the fifth consecutive year.
The fiscal deficit is expected to remain at around 151 billion in 2024-25, almost three times higher than the forecast of 58 billion before the epidemic hit, and the fallout from the crisis leaves lasting scars on the economy.
With increased government spending in response to the pandemic and declining tax revenues during the deepest recession on record, the IFS said public borrowing this year was set to reach 350 billion, the highest average level of borrowing since the 1700s.
However, despite a record increase in borrowing, the government has warned not to impose new tightening movements or raise tax levels sooner or later, even though state debt has risen to the highest level for all budget deficits since the 1960s.
In a warning to Prime Minister Rishi Sunak, the IFS said government policies need to focus on supporting the economy, regardless of the short-term fallout against the fiscal deficit for at least the next 18 months.
Although state debt accounted for more than 100% of national income, the IFS said loan costs also fell to the lowest level since the establishment of the Bank of England in the 1690s.
It also said the size of the national debt is lower than in previous periods in history and can be compared to other developed countries, including the United States and France.
Some economists and the International Monetary Fund (IMF) have told the government not to worry about rising debt levels as loan costs are plummeting and inflation is still low.
However, the IFS said, as debt repayment will account for a larger portion of government spending, the increase in loan costs could be a big problem for public finances if not accompanied by stronger growth.
It said it would require at least 40 billion tax increases or cuts in spending in 2024-25 to keep state debt at about 100% of GDP and bring debt back to pre-epidemic levels.
Paul Johnson, Director of IFS, said: As loan costs are extremely low at this time, Sunak should not be overly concerned about the resulting debt. Required. Well-directed investment spending over the coming period can help you grow and eventually help your financial figures.
Unfortunately, none of this will be enough to protect the economy in the medium term. We’re heading for a much smaller economy than expected before Covid, and we’ll probably spend more. Without action, debt, which has already reached its highest level for more than half a century, will continue to rise. Tax increases and big tax increases seem inevitable, but not until mid-year.
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