As the UK tries to recover from the economic impacts of the pandemic and Brexit, Keir Starmer’s new Labour government faces a daunting challenge: The country’s budget deficit exceeded expectations for the first four months of the current fiscal year. This puts considerable pressure on the Prime Minister to raise taxes or cut spending in order to restore balance to public finances.
Higher than Expected Budget Deficit
The official figures show that the budget deficit reached £51.4 billion ($66.9 billion) – £4.8 billion more than the Office for Budget Responsibility had forecast in March. July, one of the largest months in terms of tax revenue, even saw the Treasury run a higher than expected deficit of £3.1 billion. At the same time, national debt has remained at higher levels since the early 1960s, representing 99.4% of GDP.
Government’s Options for Deficit Reduction
In this situation, the Starmer government has two main levers to reduce the budget deficit: raise taxes or reduce public spending. Each of these options, however, has significant political and economic challenges. Higher taxes would generate additional government revenues, but could weigh on household consumption and business investment, thus slowing the economic recovery.
Moreover, such a move would be unpopular with the electorate, which has put Labour in power in hopes of reducing tax pressure. Conversely, a reduction in public spending would allow for fiscal room to manoeuvre, but would require painful choices in terms of social programmes, investments or civil servants’ salaries. Again, the economic and social impact of such a policy could be significant.
