The National Institute of Economic and Social Research (NIESR) has delivered a devastating assessment of the UK's economic prospects, warning that current government policies are fundamentally failing and have created a staggering £71 billion fiscal black hole.
Economic Stagnation and Fiscal Crisis
In their latest quarterly outlook, the prestigious economic think tank revealed that the UK economy is trapped in a state of stagnation, with no growth recorded in April following a mere 0.4% expansion in the first quarter of 2024. This bleak performance places Britain perilously close to technical recession territory.
Professor Stephen Millard, NIESR's deputy director, didn't mince words: "The UK economy is facing a triple supply shock from Brexit, COVID and the energy price shock. But it's also facing a triple demand shock coming from monetary tightening, fiscal tightening and the cost-of-living crisis."
The £71 Billion Challenge
The institute's analysis presents a sobering picture for whichever party forms the next government. NIESR estimates that maintaining current public service levels while keeping debt on a sustainable path would require finding approximately £71 billion in tax increases or spending cuts by 2028-29.
This fiscal black hole represents one of the most significant challenges facing policymakers in decades, with difficult choices awaiting the incoming administration after the general election.
Interest Rates and Inflation Concerns
NIESR's forecast suggests the Bank of England will maintain interest rates at 5.25% until August, with only gradual reductions expected thereafter. The think tank predicts inflation will remain stubbornly above the Bank's 2% target until the second half of 2025, creating ongoing pressure on household budgets.
The report highlights how elevated interest rates are particularly damaging for the approximately 30% of UK households with mortgages, who face significantly higher housing costs compared to pre-pandemic levels.
A Nation Divided: The Haves and Have-Nots
Perhaps the most alarming finding concerns the growing wealth divide across the UK. NIESR analysis reveals that approximately 60% of British households have seen their real incomes recover to pre-pandemic levels, while the remaining 40% continue to struggle with significantly reduced purchasing power.
This economic divergence is creating what Professor Millard describes as a "vicious cycle where the lack of growth makes it difficult to address the fiscal problems, and the fiscal problems make it difficult to address the lack of growth."
Regional Disparities Widen
The report further emphasizes the growing geographical economic divide, with London and the South East pulling away from other regions. This regional inequality presents additional challenges for national economic planning and social cohesion.
As the general election approaches, NIESR's warning serves as a stark reminder of the profound economic challenges awaiting the next government, regardless of which party secures victory.
