Research from the Politeia think tank warns that the UK is facing a future of “permanent economic stagnation” if it fails to control public spending. Former City economist David B Smith is concerned that Britain’s tax burden already appeared close to the upper limit of “historic sustainability” before the pandemic with government spending at the “high end of the danger zone”.
He fears a collapse in growth with “horrendous implications” for the stability of the country.
The report, which comes ahead of Chancellor Rishi Sunak’s spending review on Wednesday, warns: “The UK’s public finances were an accident waiting to happen well before the iceberg Covid-19 ripped the side off Britain’s fiscal ship of state.”
Mr Smith states: “Even before the Covid-19 crisis, the UK government spending to GDP ratio was high by historic standards, especially given the tight labour market and other signs that the economy was operating above capacity, such as the balance of payments deficit.
“Furthermore, the tax burden already appeared to be close to the upper limit of historic sustainability before the current pandemic.
“The concern now is that the recent UK growth trend of around 1.5 percent each year will collapse to zero, or remain negative, even after the Covid-19 crisis has burned itself out.
“This would have horrendous implications for social and political stability, as well as the public accounts and the wider economy.”
Pushing for a change in approach from the Treasury, he concludes: “It is hard to be positive about the nation’s longer term fiscal and economic prospects given the current approach and the Conservatives’ unwillingness to forewarn the populace about the longer term consequences of ‘spend, spend, spend’.
Possibly, the best one can do is emphasise that any attempt by the government to tax its way out would massively backfire economically and worsen the public finances, not improve them.
“Enhanced fiscal parsimony – accompanied by politically ‘brave’ rhetoric to explain the fiscal facts of life to voters – will be required if the UK is not to become a permanently stagnant, and low or negative-growth economy.”
