Britain’s incoming prime minister faces an annual public-finance challenge estimated at £330 billion, or about US$442 billion, as weak economic growth, an ageing population and rising levels of ill health place increasing pressure on government finances.
The Resolution Foundation said Andy Burnham, who is due to replace Keir Starmer in Downing Street on Monday, will need to establish a new fiscal strategy. Without significant reform, the government could face increasingly difficult choices involving higher borrowing, tax increases and cuts to public spending.
According to the left-leaning think tank, approximately two-thirds of the £330 billion annual shortfall can be linked to slower economic growth per person since 2007. Britain’s prolonged period of weak productivity and limited improvements in living standards has reduced tax revenues while increasing pressure on public services and welfare programmes.
In its assessment of what it described as Britain’s two-decade fiscal decline, the Resolution Foundation proposed several reforms to improve the long-term sustainability of the public finances.
One recommendation is to replace the state pension “triple lock” with a less costly system that increases pensions in line with average earnings. Under the existing arrangement, state pensions rise by whichever is highest: wage growth, inflation or 2.5 per cent. The foundation believes linking increases only to average earnings would reduce future costs while continuing to protect pensioners’ incomes.
The think tank also said the government must find a replacement for declining fuel-duty revenue. Receipts from the tax are expected to fall as more motorists switch from petrol and diesel vehicles to electric cars.
Greater investment in public services was also recommended to address weak productivity. Improving the performance of healthcare and other government services could help more people return to employment while reducing long-term pressure on public finances.
The report comes as Britain’s limited financial buffer has been further weakened by international developments. The economic effects of the conflict involving Iran are estimated to have reduced the government’s headroom under its current fiscal rules from £23.6 billion in March to approximately £10 billion.
The findings underline the scale of the challenge confronting the new government. With economic growth remaining weak and spending pressures continuing to increase, the next prime minister may have limited room to introduce major new programmes without raising taxes, reducing expenditure or changing existing fiscal rules.
The Resolution Foundation argued that a broader and more sustainable strategy will be needed to strengthen economic growth, reform major spending commitments and prevent Britain’s public-finance difficulties from becoming more severe.
