Neither main party has a credible plan to tackle rising spending pressures. CPP estimate that by 2030, this will generate a £142bn black hole. Current spending plans – which imply a cut to much day-to-day spending – are a fiction. A more honest approach would look at how we can raise more tax revenue to close that gap.

This briefing summarises CPP's calls for a rapid review of tax reliefs, and looking again all forms of income – capital and labour – equally. We also need growth, and that requires higher public investment. We argue for a recalibration of the UK's fiscal rules to enable more investment in projects with longer-term payoffs, particularly where investment would help raise living standards for low-middle earners or reduce regional inequality.

In January, Richard Hughes, Chair of the UK’s fiscal watchdog the Office for Budget Responsibility (OBR), made headlines with comments to the Lords Economic Affairs Committee. He said:

“Some people call [the OBR’s government spending projections] a work of fiction, but that is probably being generous … someone has bothered to write a work of fiction … the government hasn’t even bothered to write down what its departmental spending plans are underpinning the plans for public services.”

Why is Hughes describing his own forecasts as ‘worse than fiction’?

As we have set out in previous CPP analysis, our ageing society and the rising cost of public service delivery means that – to just maintain public services as they are today – we need to spend an additional £142bn a year by 2030 (equivalent to a 1.56% increase in annual real terms public spending).

There is no scenario in which implementing currently penciled-in cuts to unprotected departments would be politically or economically palatable. Many of these services – including local governments, prisons, and courts – are already creaking under considerable strain, and the British public has no appetite for another round of austerity. Planned cuts would reflect a further round of austerity nearly three-quarters the size of the cuts delivered in the the early 2010s.

And that is only on day-to-day government spending. Capital budgets – investments in things like roads, rail, or innovation assets which can boost long-term growth - have been cut by over 20% in real terms since 2010. The UK is an international laggard when it comes to public investment, consistently featuring in the weakest third of OECD economies. Further cuts are planned which, if implemented, would likely make efforts to tackle our stagnant productivity growth near impossible.

Neither Labour nor the Conservatives are willing to publicly acknowledge the fiscal challenges that lie ahead, as well as what they may mean for public services and public investment.

The Conservatives want to abolish National Insurance (NI) contributions for workers entirely over the longer-term, and have committed to a further 2p cut in employee NI, as well as abolishing the main rate of self-employed NI, by the end of the next parliament. Their manifesto commits to some £17bn in various tax cuts, overall. Labour has pledged no increases to income tax, NI and VAT, has ruled out a wealth tax, and has stated a desire to lower the tax burden ‘on working people’ wherever they can.

Both parties have signed up to maintain the government’s principal fiscal rule: for government debt to fall as a percentage of GDP between the fourth and fifth year of the forecast period. Although Labour has spoken positively about their ambition to raise public investment, notably through their Green Prosperity Plan worth £23.7bn over the next parliament, this alone would not be enough to offset the cuts that have been penciled to come in post-election.

If there is any semblance of a recognition of the challenges ahead from both sides, it is perhaps in the commitment both have made to maintain the current ‘fiscal drag’ - the freezing of income tax thresholds that have been in place since 2021 until the end of the next parliament.

There may be short-term electoral benefits to politicians ruling out increasing the tax burden beyond the freezing of thresholds: the cost of living routinely polls as the issue voters are most concerned by. Both sides are rightly making the case for economic growth as a solution. But as a recent article in The Economist sets out, even on the most optimistic growth forecasts, it is unlikely that the UK economy will grow fast enough to spare the next government being faced with a fiscal shortfall and having to raise taxes and/or borrowing to fill it.

The next parliament will undoubtedly be a tax-raising one, driven by the toxic combination of low growth, an ageing society, and growing cost pressures on public services.

The question is not whether taxes or borrowing will need to be raised over the next parliament, but how to raise revenue – as well as looking again at the balance between higher taxation and borrowing.

At CPP we think there are two big opportunities for the next government: ironing out inconsistencies in the tax system, and adopting an approach to borrowing that gives more room to 'spend to invest'.

1. Review current tax reliefs, tax capital and labour fairly, and do more to tax windfalls

The current spending review period will end in March 2025, leaving a window of around 9 months for the new government to develop new spending plans for government departments.

There is potential for a few quick wins before next March, by targeting some of the low hanging fruit on the UK’s complex tax system.

The UK has around 1100 tax reliefs, costing some £400bn. While removing the panoply of small reliefs can be a political headache – as George Osborne found out with his 2012 “pasty tax” budget – there will never be a better opportunity to get rid of inconsistencies than in a first budget. CPP identifies £8.1bn of priority tax reliefs to abolish or reform that are either inefficient, outdated, or incentivise bad behaviour: Business Asset Disposal (BAD) Relief, capital allowances for new oil and gas developments, business property relief, and reforming R&D tax credits. A full review of the tax relief system, ahead of the first budget, will unearth more tax exemptions that may distort the new government’s overarching economic strategy. These exemptions should be abolished.

Second, some taxes will need to rise if we want to close the £142bn spending gap without cutting services. Should politicians not want to raise taxes on earned income (or ‘working people’), they will need to consider further taxation of wealth and capital. CPP recommends equivalising capital gains tax (CGT) with income tax which could raise an additional £10bn-£20bn per annum.

In exceptional circumstances, there is also a case for one-off tax measures, for instance on excess business profits, or on personal wealth. We have seen that recently with windfall taxes on energy companies (which both Labour and the Liberal Democrats are pledging to expand). The next government may also wish to introduce longer-lasting new taxes on either earned or unearned income, in addition to current taxes on earned income.

‘Solidarity taxes’, that are levied at a fixed rate and typically earmarked to support services or schemes with broad public support, could be an option. The most recent example - the Health and Social Care Levy introduced by the last government, was widely criticised at the time for being a regressive tax, placing an additional levy on National Insurance (NI) and disproportionately affecting lower earning workers. Future solidarity taxes could be an option to raise revenue – but we recommend they be applied only to regular income taxation (an example would be the Lib Dems 2019 manifesto pledge for a “penny on income tax for health and social care”), or on unearned income.

Although they may wish to carefully choose the moment to announce and implement such taxes, the next government should waste no time in identifying options for different forms of wealth taxation and solidarity taxes. Developing a list of criteria for their use should also be a priority for the next government– for example, future energy shocks may warrant a levy on energy company profits. Such policies could be a powerful tool for funding capital programmes with a clear narrative on future growth and resilience, for instance to fund a national housing retrofit scheme, rather than day to day expenditure.

2. Reform the current fiscal rules to help spur public and private investment

Both main parties are committed to retaining the five-year debt rule. This provides more flexibility than meets the eye in the short-term. But this has created a break on investments that take more than five years to pay off.

At CPP, we want to see three reforms to how the UK approaches public investment.

First, we believe that departments should be able to submit applications for some forms of day-to-day spending to be badged as ‘investment’ – by exception, and with the consent of the OBR as a check. This could be investment into preventative services; early years human capital; or in support of realising the value of a capital investment (funding staff to go inside new buildings, for a limited period).

Second, the next government should explore extending the forecast horizon from five years to ten. Accounting rules sometimes stand in the way of sensible policy changes, such as how the government responds to pension liabilities. We call for the OBR and the National Infrastructure Commission to define a set of priority infrastructure projects, which are analysed separately in the OBR’s fiscal sustainability report.

Third, most focus in the public debate is on how much the government invests. But we should also ask about how better we can target investment to support wider policy objectives, such as reducing poverty and regional inequality. We call for greater emphasis on distributional and local area impact assessments when appraising potential investments, over narrowly-defined cost–benefit analysis. This would ensure the benefits of investments are felt more broadly, in line with the 2022 revisions to the Treasury’s Green Book guidance on project appraisal.

CPP are not alone in pointing out that unless the next government increases revenue, we are heading for another round of austerity-era cuts. The OBR, IFS, Resolution Foundation, and NIESR are aware. The British public are aware.

Higher economic growth will provide us with more revenue to fund public services, but even the most bullish forecasts do not imply growth rates towards the end of the parliament high enough to offset the need for higher taxes to plug gaps in day-to-day spending. Politicians would be wise to remind themselves that there is no neglected, cobweb covered growth lever buried in the vaults of the Treasury. If the next government truly wants to revitalise public and private investment, rebuild public services, raise living standards, and reduce inequality, reform alone will not be enough.

Politicians and political advisors, too, will be aware. The ‘conspiracy of silence’ described by the IFS’ Paul Johnson is real. But while ruling out tax rises may help gain favour among the electorate in the short-term, the story of the last parliament shows it doesn’t take long for public support for the governing party to collapse. The next government will need to tread carefully if it hopes to turnaround the British economy while retaining an electoral coalition to carry it on through for several parliaments to come, given they will not have a democratic mandate to raise taxes to the level they will need to. They must be honest, sooner rather than later, with the choices that lie ahead of us. As the public’s confidence in politicians has fallen off a cliff in recent years, it is the least they deserve.