A pre-election gloom

Think tank: National Institute of Economic and Social Research (NIESR)

Author(s): Various authors

May 9, 2024

This report from UK think tank NIESR provides a quarterly economic forecast of the UK economy.

Continued anaemic UK GDP trend growth, at about 1 per cent, together with inflation coming back to target, means that the winner of the next general election will have to raise taxes to maintain the existing provision of public services.

Our analysis shows that there is essentially no fiscal headroom for any further tax cuts, given that the government’s current spending plans do not meet their ‘self-imposed’ fiscal rules. Not only are these rules not being met, but they are also inadvertently preventing good fiscal decision-making by constraining the public investment needed to improve economic growth and ensure the United Kingdom meets its net zero target by 2050.

We also identify that, whilst average living standards will improve by 6 per cent in 2024-25 relative to 2023-24, a substantially different picture emerges across the income distribution: households in the bottom decile will experience a 2 per cent fall, while households in deciles 4-9 will see a 7-8 per cent rise in their disposable incomes.

Targeted policies have helped the hardest hit households the most, whilst the recent tax cuts have been regressive. The Cost-of-Living payments provided much-needed assistance to low-income households, whereas the four pence cut to National Insurance benefitted high-income households disproportionately.