• The Centre for Progressive Policy (CPP) reveals stark cost of maintaining public services including health, welfare and pensions at current levels over next parliament, given demographic and cost pressure
  
• In lieu of spending cuts, CPP estimates that taxes will need to increase from 36.5% to 38.8% of GDP to halve the projected deficit
  
• CPP sets out four solutions to the UK’s public spending challenge, including reforming fiscal rules, reforming tax policy, targeting additional spend towards policies that drive productivity growth, and giving places more money to spend locally

The next government will need to spend an additional £142bn per year by 2030 (equivalent to a 1.56% increase in public spending per year) just to maintain current levels of public services, according to economics thinktank the Centre for Progressive Policy (CPP). In a new major report, CPP models the impact of the UK’s ageing population and price rises on core public services spending, including healthcare, pensions and education.

The biggest drivers of spending increases are health, welfare (especially pensions) and education:

• Health spending is projected to rise by £50bn per year by 2030 - equivalent to a 2.49% per year rise between now and 2030.
• Social protection spending is projected to rise by £39.5bn per year by 2030 - equivalent to 1.59% per year rise between now and 2030
• Education and training spending is projected to rise by nearly £9.8bn per year by 2030 – equivalent to a 1.14% per year rise between now and 2030

With the electorate hungry for improvements to public services, the report argues that tax rises are inevitable to avoid a prolonged and unsustainably large budget deficit (expected to be £135bn in 2030). To halve the projected deficit, CPP estimates that taxes would likely need to rise from 36.5% to 38.8% of GDP by 2030 which would be historically high for the UK, although not out of sync with many European peers.

CPP’s report looks to inject some realism into the debate on the state of the UK’s public finances ahead of the next election. Labour is determined to fight the election on the economy, pledging iron-clad fiscal discipline and no tax rises. But given rising demands on public spending and Labour’s ambitions for transformative change, any plan that does not involve taxing and spending more is simply not credible. The report puts forward four solutions to the UK’s public spending problem and drive long-term growth across the UK:

• Target £19bn of additional public spending per year on areas proven to have an impact on productivity growth including public health, early years, childcare and adult skills to equip the UK workforce and economy to benefit from the net-zero transition.¹
  
• Reform the UK tax system to fund these investments, including by equalising the rate of capital gains tax with income tax to generate between £10bn and £20bn per year, and by abolishing ineffective tax reliefs such as capital allowances for oil and gas firms (generating an estimated £8bn per year).
  
• Reform the UK’s fiscal rules to support borrowing linked to productive long-term investment and spending, and strengthen the OBR to create a stable, trusted platform for better, longer term policy decision making.
  
• Hand 2% of income tax to local places to drive growth across the UK, with a proportion of this pooled and redistributed to help tackle chronic inequalities within and between places.

CPP has worked with a Citizens’ Jury representative of the UK public to determine which solutions could command broad public support. The majority of members of the jury agreed that government should raise taxes (86%) or increase borrowing (77%) to fund public services like healthcare and education.

Charlotte Alldritt, CEO of the Centre for Progressive Policy said:

“Our analysis shows the harsh reality of the increase in public spending the next government will need to undertake just to stand still. Keir Starmer has talked about a decade of renewal and fair growth in all places. These are the right aims, but Labour is kidding itself if it thinks they can be delivered for free.

“Labour may see a focus on fiscal discipline as politically imperative in opposition, but to make any progress on reversing our economic stagnation, it will need to take a longer-term view of how spending can contribute to fair growth.

“Our report sets out a credible plan for how to do this, including by making fiscal rules more flexible, strengthening our financial institutions, broadening the tax burden and handing more money to places to spend. Labour has indicated a willingness to make progress on each of these areas, but it will need to go much further to deliver the investment our economy needs.”