UK tax burden to hit record high regardless of Budget, analysis finds

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Jeremy Hunt lacks the fiscal firepower to prevent Britain’s taxes climbing to a record high as a share of national income no matter what he announces in next week’s Budget, new analysis has found.

Tax revenues, which accounted for about 33 per cent of national income on the eve of the pandemic, are set to climb to 37.7 per cent by 2028-29 — the highest since the end of the second world war, according to research from the Institute for Fiscal Studies think-tank.

UK public spending is currently forecast to decline from 44.8 per cent of national income today to 42.7 per cent in 2028-29, but this will still be more than 3 percentage points higher than in 2019, the IFS said in a report published on Tuesday.

Paul Johnson, IFS director, said this meant the legacy of the current Conservative government would be a lasting increase in the size of the state, driven by the pressures of demographic change, the cost of living crisis, unsustainable public sector austerity and renewed defence spending.

“This parliament will be looked back on as the point at which all this burst out,” he said, adding that while any government would face similar pressures, “we will look back on this period as one where the British state, after a long period of stability, actually grew by 3 or 4 per cent of national income”.

The rise in the tax burden reflects the 2021 increase in the rate of corporation tax and the multiyear freeze in most personal tax thresholds, as well as changes in the underlying economy that have boosted the tax take — only partly offset by the recent cut in the rate of national insurance contributions.

Any tax cuts Hunt could plausibly announce next week would not be enough to reverse the increase, the IFS said. Even if the chancellor announced a £7bn cut in income tax, as some have speculated, this would be far outweighed by the freeze in personal tax thresholds, which the think-tank said would raise £44bn a year by 2027-28.

The IFS warned that despite the rising tax burden the chancellor would only just meet his fiscal target to put public debt on a downward trajectory in the medium term. Even then he would be relying on plans for spending cuts that looked unrealistic in the absence of any details on where the axe would fall, it added.

Hunt has pencilled in plans for day to day spending on public services to rise by 0.9 per cent a year above inflation over the four years from April 2025 but this would have to accommodate pledges to raise defence and aid spending in line with gross domestic product, maintain schools funding, bolster the NHS workforce and expand state-funded childcare.

After factoring this in, expenditure in some areas — such as local government, courts and prisons — would face cuts unless the next government tops up spending by £20bn in 2028-29, the IFS estimated.

If the population grows in line with the latest official projections, per capita spending will be even tighter, with unprotected government departments facing cuts of 4 per cent a year, or £25bn by 2028-29.

“The chancellor is running very, very, very close to the wind,” Johnson warned. “There are huge backlogs in the justice system, local authorities going bust right, left and centre, huge waiting lists in the NHS, universities genuinely starting to struggle with 10 years of frozen income and a social care system that is struggling and dependent on immigration . . . it’s not a realistic conversation.”

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