LONDON (Reuters) - Britain’s state spending will head back to levels not seen since the 1970s if the two main political parties in the Dec. 12 election make good on their promises, a think-tank said on Monday, warning that taxes will have to rise too.
After a decade of tight controls on the budget to fix the damage wrought by the financial crisis, Prime Minister Boris Johnson’s ruling Conservative Party and the opposition Labour Party are both wooing voters with spending plans.
“The shared commitments to ending austerity, reversing elements of it, and big infrastructure plans mean Britain could be heading back to a 1970s-sized state,” Matt Whittaker, deputy chief executive at the Resolution Foundation, said in a report.
Finance minister Sajid Javid announced in September the biggest funding increases for public services in 15 years, and says he wants to spend more on infrastructure too, echoing the plans of left-wing Labour.
“The fact is that whatever promises are made over the course of this election campaign, taxes are going to have to rise over the coming decade,” Whittaker said.
Johnson has said he wants to lower taxes as well as raise spending. Labour would increase income tax for the top 5% of earners and raise corporate taxes to help fund its spending plans, the party’s would-be finance minister John McDonnell said on Sunday.
Under the Conservatives, Britain has cut its budget deficit from 10% of gross domestic product in 2010 to about 2% now.
But the deficit has started to widen again after former prime minister Theresa May began to relax her government’s grip on public pay in 2017 and promised big increases in health spending.
Britain’s public debt stands at 1.8 trillion pounds ($2.3 trillion), or 80% of GDP - more than Germany but less than the United States, Japan and France. Analysts have warned it could rise again as a share of the economy, especially with the outcome of Brexit, and its impact on the economy, so unclear.
But there has been little sign of nervousness among investors with government borrowing costs close to record lows.
The Resolution Foundation, a non-partisan think-tank which focuses on issues facing low to middle-income households, said government spending could rise to 41.3% of GDP by 2023 from about 40% now under the Conservatives’ existing plans for more infrastructure and day-to-day spending.
That would be well above the average of 37.4% in the two decades running up to the financial crisis of 2008-09, and only marginally below the average of 42% between 1966 and 1984.
Further health spending on Britain’s ageing population would take spending above the 1970s average, the report said.
If Labour repeats its 2017 election promise of 48.6 billion pounds ($62.85 billion) of extra spending on services, coupled with its new 10-year 250 billion-pound infrastructure plan, public spending would hit 43.3% of GDP, significantly above the 1970s average, the Resolution Foundation said.
However, that would still be smaller than government spending in Germany and France which stood at just over 44% and 56% of GDP respectively in 2017, according to figures from the Organisation for Economic Co-operation Development.
Writing by William Schomberg; Editing by Susan Fenton and Philippa Fletcher
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