Boris Johnson’s election spending pledges have left a Conservative-led administration with a slender chance of staying within its borrowing limits if it returns to power, according to a leading thinktank.
The extra costs of employing 50,000 more nurses and increasing the national insurance personal threshold to £9,500 would leave the “smallest headroom any chancellor has had” against a government borrowing rule, the Resolution Foundation said.
Without an increase in taxes or greater restraint on spending, under a Tory government a £5bn cushion would face an 86% chance of being wiped out by 2023, either from a mild downturn in the economy or a correction of over-optimistic forecasting, the thinktank said.
A Tory government would also need to row back on its pledge for further increases in the national insurance personal threshold, which is expected to cost £6bn a year, and accommodate unfunded investment plans worth £1bn by 2023.
The thinktank warned in a report that Labour and the Conservatives are already on course to break their new fiscal rules, announced less than a month ago, as a result of pledges made in their manifestos and in leadership speeches.
The main parties have adopted tax and spending rules that commit them to balancing day-to-day spending over three years in the case of the Tories or five years in Labour’s case, putting a limit on debt servicing costs and, in Labour’s plan, improving the value of public assets over the course of the parliament.
The Foundation said that fiscal rules were important for the government’s stewardship of the public finances, and testing its economic priorities.
However, it warned that fiscal rules “are only useful if they are credible and adhered to”. It added: “Failing to meet them at the first opportunity – as both main parties risk doing – would damage rather than enhance the UK’s economic credibility.”
Labour is already on course to break its goal of a current budget balance – where government income matches day-to-day spending – in five years’ time, the foundation warned.
“While the party argues it has £6bn of headroom in 2025, this is more than wiped out by failing to account for the £10bn interest and depreciation costs that their investment plans would add to current spending by the end of the forecast period,” it said
The report argued that the commitment to compensating “Waspi” women born in the 1950s and affected by an increase in the state pension age could add a further £12bn a year to current spending.
“A future Labour government would therefore need to either row back on several big manifesto commitments, announce further tax rises or take a big economic credibility hit from missing its fiscal rules,” it said.