Economy

Labour risks breaking debt rule with net zero borrowing binge


Calculations by the IFS suggest Labour’s plan will mean debt rises from just under 92pc of gross domestic product (GDP) this year to 93.6pc by 2028, before only barely falling in the final year.

The think-tank said Labour’s net zero drive would lift growth and tax revenues, but not in a way that pushed debt down meaningfully as a share of the economy.

More borrowing would result in higher debt interest costs. While Mr Reeves has pledged to abide by “iron-clad” fiscal rules, the IFS analysis suggests there is a high chance she could miss her primary target to get debt falling within five years, a policy she has adopted from the Tories.

A looser annual borrowing rule will allow Labour to increase the deficit for investment spending. However, the IFS said its forecasts suggested whoever is the chancellor will be “fortunate” to get debt falling by 2030, which both Labour and the Conservatives have committed to.

In a withering assessment, economists said neither Labour nor the Tories appeared “serious about the underlying principle of getting debt falling”.

Isabel Stockton, senior research economist at IFS, said the current debt rule had enabled Mr Hunt to ramp up spending for three years as long as he exercised fiscal restraint in the following two years.

She said: “It is eminently gameable – and has already been gamed almost to irrelevance by the current government; it is the loosest debt rule we have had in the past 30 years; and yet it is currently so constraining that it will either be breached, or will result in policies in practice quite different to those currently being peddled.

“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.”

It came as the Resolution Foundation warned that the next government faced a potential £12bn black hole in the public finances if the Bank of England keeps interest rates higher for longer or growth disappoints.

It warned that one-off compensation for the victims of the infected-blood scandal and increased spending on asylum applications and migration policies alone would pile pressure on the public finances over the next few years. Mr Hunt currently has £8.9bn of headroom to meet his goal of getting debt falling within the next five years.

However, the Resolution Foundation said “significant uncertainty” about the economic outlook could easily erode this slim breathing space.

Delays to interest rate cuts already imply “borrowing would be just over £2bn a year higher on average between 2024-25 and 2026-27,” it said.

The Foundation added that additional costs, such as a likely £10bn in compensation for the victims of infected-blood products and around £4bn in extra spending on policies aimed at curbing immigration, would also pile pressure on the public finances.

Under an adverse scenario where all these costs arise amid weak growth, the think tank warned that the Treasury’s £8.9bn buffer could swing to a £12bn shortfall.

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

“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.

“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.”



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