Rishi Sunak and Keir Starmer warned ‘high taxes and tight spending’ are here for at least two years

The Government has no money to offer tax cuts or spending hikes in the near future, top economists have said in a warning to Rishi Sunak and Sir Keir Starmer.

The respected Institute for Fiscal Studies (IFS) concluded in its pre-Budget report that lower-than-expected borrowing this year would not allow the Chancellor to loosen his grip on the public finances.

And it warned the current squeeze would continue well into next year – suggesting that if Labour wins the next general election it will still be tightly constrained.

Jeremy Hunt is delivering his autumn statement in five weeks’ time and has already said he will be unable to cut the tax burden. The Office for Budget Responsibility is likely to increase its estimates of future borrowing because the cost of servicing the public debt has increased and economic growth has weakened, the IFS said.

Increasing borrowing in order to reduce taxes or ease the squeeze on public spending would risk forcing the Bank of England to hike interest rates again, it warned.

Given weak growth, the total size of the Government’s debt is set to remain at almost 100 per cent of GDP, a record in peacetime. The IFS concluded that the public finances were more likely to get worse than improve, because the current forecasts are based on a number of unrealistic assumptions including that fuel duty will rise, most public spending will be cut after next year and the current freeze on income tax thresholds will stay in place until 2027.

IFS director Paul Johnson said: “We are in a horrible fiscal bind. With taxes at record levels, and government revenues forecast to exceed non-interest spending for the first time in a generation, you might expect plenty of room for either tax cuts or spending increases.

“But poor growth and very high spending on debt interest over the next few years mean that the national debt is stuck at close to 100 per cent of national income, even with tight spending settlements and further big tax rises in the pipeline. The price of our high levels of indebtedness, failure to stimulate growth, and high borrowing costs is likely to be a protracted period of high taxes and tight spending.”

The think-tank warned that the Bank of England risked “its job being made even harder by an ill-timed fiscal giveaway”, which would risk a recession by encouraging the Bank to keep interest rates at their current high level for longer.

The IFS report came ahead of the release of new data on unemployment and wage rises being published on Tuesday which will provide fresh evidence of how interest rates are affecting the real-world economy, and the latest set of inflation statistics published on Wednesday.

A Treasury spokesman said: “After we stepped into support families and businesses during the pandemic, Putin’s invasion pushed up inflation and interest rates – meaning we spent twice as much on servicing our debt last year as the year before.

“Contrary to previous reporting, the UK’s growth projections have recently been dramatically upgraded with the IMF confirming that the UK will grow faster than Germany, France and Italy in the long term, as well as being the fastest major European economy to recover from the pandemic.

“We must stick to our plan that we are delivering to halve inflation, which will help unlock sustainable growth, support families with the cost of living and get debt falling.”