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United Kingdom Faces Dilemma: Raising Taxes or Stimulating Growth to Meet Fiscal Goals Amid Spending Pressures

United Kingdom Faces Dilemma: Raising Taxes or Stimulating Growth to Meet Fiscal Goals Amid Spending Pressures

Unless future governments increase revenues, cut welfare spending, or significantly boost economic growth, the UK's debt-to-GDP ratio will exceed official projections due to ongoing pressure for increased expenditure.

 Anticipated increases in government debt over the medium term are likely to compel future UK administrations (rated by Scope Ratings AA/Stable Outlook) to raise taxes unless there is a sustained improvement in the growth outlook. The UK's economic output is projected to grow by 0.6% this year, slow to 0.4% in 2024, and then recover to around the country's potential growth rate of approximately 1.5% in 2025.

The UK's government gross debt as a percentage of GDP was 101% in 2022, lower than peer countries such as France (rated AA/Negative Outlook) at 112% and Belgium (AA-/Negative Outlook) at 105%. However, given increasing spending pressures and limited fiscal flexibility maintained by the current chancellor in comparison to predecessors, it is expected that the debt will gradually increase to approximately 110% by 2028, in line with France.

The current spending plans suggest a significant reduction in public-sector net borrowing from 4.5% of GDP to 1.1% between 2023-24 and 2028-29. This reduction would be primarily driven by higher tax receipts, reduced departmental spending, and decreased interest costs.

Despite the plan for real declines in departmental spending, the government may face challenges due to public sector productivity remaining below pre-pandemic levels. Additionally, the lack of detailed spending priorities for the entire forecast horizon could impact the UK's ability to meet the forecasted debt-to-GDP trajectory by the Office for Budget Responsibility.

The UK has seen a rise in tax burden due to higher inflation pushing more individuals into higher income tax bands, leading to increased tax revenues for the government. However, in comparison to other large European economies, the UK's tax burden is relatively low, leaving room for potential fiscal consolidation.

Without increasing taxes or achieving stronger economic growth, the country is likely to experience either a further decline in public services and welfare provision or higher budget deficits.  

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