A BLUEPRINT FOR A SENSIBLE FISCAL PLAN which could stabilise the economy, secure public services, and begin to improve the long-term health of the economy has been published by the Institute for Public Policy Research (IPPR).

Amid the cost-of-living crisis, during which time people and businesses need urgent support, economists at IPPR have shown that it is possible to deliver, support and design a healthier, more resilient economy for the future.

In the short-term, government spending is most constrained by risks of fuelling inflation. But IPPR finds that even within this constraint, and based on policies in August – before the energy price cap and mini-budget were announced – the government has £90-120 billion of ‘fiscal space’ with which to make spending choices that will support people and growth of the economy next year.

Even on current policies – taking account of the mini-budget, the energy price cap until April and the U-turns announced before Rishi Sunak became prime minister – there remains at least £42 billion of ‘fiscal space’ in 2023. If taxes on windfall profits and the very richest were also raised, this would be further increased.

IPPR’s plan shows that in the short term:

The Bank of England can help to contain inflation: The economists propose that the Bank should raise interest rates more slowly than markets expect, to about three to four per cent. Given this, the government would have had fiscal space of £90-120 billion in 2023 based on policies in August, before Liz Truss took office.

The government can get support to people and businesses that need it most: People are struggling to keep their heads above water, and to run their businesses as they navigate high energy bills and the impact of inflation. Getting direct support to those who need it most would help to break the rising tide of destitution. It would also reduce the risk of inflation, because direct support could enable businesses to avoid raising prices, and workers from needing high wage increases.

To keep inflation in check while supporting households and businesses, tax revenue can be increased by about £40 billion, with a focus on recent financial ‘winners’: The pandemic saw huge financial gains for some of the wealthiest companies and individuals in the country. Increasing the windfall tax on energy companies, and taxing wealth (capital gains and dividends) at the same rate as peoples’ hard-earned income through work would help to increase the UK’s tax revenue fairly, ensuring that those with the broadest shoulders make the right contribution and reducing the risk of public spending fuelling inflation.

Meanwhile, in the medium term, the research shows that:

The government could in the medium term run a primary deficit of £49 billion (two per cent of GDP) and still have a stable amount of debt: Claims regarding the size and nature of the UK’s ‘fiscal hole’ often rest on bleak underlying economic assumptions. Instead, the ‘fiscal space’ that is compatible with the government’s fiscal rules depends heavily on economic conditions and how borrowing is spent. The analysis shows that if economic conditions returned to be similar to pre-pandemic by 2025, the government could run a primary deficit of £49 billion (two per cent of GDP) and still have a stable amount of debt. This contrasts with often cited claims that the UK has to run a primary surplus to stabilise its debt.

Economists at IPPR say that their blueprint offers the government a practical, sensible alternative to austerity, a return to which would “undermine the foundations of our economy and widen inequalities”. The IPPR alternative considers the full picture of the economy which includes well-funded public services, learns the lessons from the mini budget market turmoil as well as from the a ‘lost decade’ of austerity in the 2010s – and offers a plan to stabilise the economy fairly and enduringly.

Carys Roberts, executive director at IPPR, said: “After turmoil in the markets following recent government decisions, the new prime minister and chancellor have both spoken of ‘difficult decisions’ to come. They are implying that reductions in spending will be inevitable – but that is a political choice which will undermine the foundations of our economy and widen inequalities. There is a far more sensible alternative.

“Our blueprint, published today, shows government how to avoid fuelling inflation – already highest among G7 countries – in the short term, and deliver a healthy future for public finances and the people of the UK in the long term”.

Carsten Jung, senior economist at IPPR, said: “We face a serious economic situation with inflation running high and people’s livelihoods in peril. But spending cuts will not get us out of this crisis. On the contrary, the right policy mix can tame inflation and stabilise the economy at the same time – without spending cuts.

“The government has significant fiscal space to spend on household support and the economy, if combined with some tax increases and gentle interest rate rises. The lost decade following the financial crisis has shown us that austerity enduringly harms people and growth. It is wrong to frame cuts as inevitable – they are not.”

* Read Spending and stability: How much fiscal space does the UK have? here.

* Source: Institute for Public Policy Research