Why the UK Tax Burden is Set to Rise: An Economic Forecast
Introduction
In this article, we discuss the future prospects of the UK tax burden and why credible low-tax options for British voters in the next election are unlikely. Both major political parties, including the Conservatives, are reluctant to convey the impression that taxes will continue to rise and public spending remains unsustainable. However, the reality is that short-term strategies to reduce the tax burden are challenging to implement.
The Illusion of Tax Cuts
While the Conservatives may dream of promising a tax-cut program to win votes, the practicality of implementing such measures is limited. Labour, on the other hand, aims to prove economic trustworthiness by pledging to meet Tory tax policies initially. Despite these political promises, the tax burden is projected to increase to 37.7% of GDP by 2027/8.
The Challenge of Reshaping the Economy
Both major parties will talk about reshaping the economy and promise future growth, but they will have limited ability to significantly reduce the tax burden in the near term. In the past, parties have debated how to balance the proceeds of growth between spending and tax cuts. However, the next government will face a different reality, with the best option being a reform spurt that promotes higher growth and facilitates better decision-making.
Revenue Challenges and Expenditure Commitments
The UK not only grapples with sluggish economic growth but also faces serious revenue challenges and rising costs associated with high levels of debt. The Office for Budget Responsibility’s fiscal risks report highlights the concerns. Immediate issues include the costs of servicing debt and the UK’s aging society, which increases the tax burden on a relatively small number of workers.
- Interest payments on debt alone were £9.8bn in April.
- The loss of fuel tax revenues due to the switch to electric vehicles and commitments to decarbonization will pose a £66bn challenge by 2030.
- The need to curb debt means that tax cuts require spending cuts.
The Limited Room for Maneuver
Despite potential reforms, the reality is that both parties have limited room for maneuver when it comes to lowering taxes. The Conservatives, even with a large majority, were cautious about planning reform due to its potential unpopularity. Until trend growth reliably surpasses two percent, there is little flexibility in terms of reducing the tax burden.
Continued Tax Hikes and Outlook for the Future
The freeze of income tax thresholds by Rishi Sunak has been described as the biggest tax-raising measure since the 1970s. By 2028, around 14% of UK taxpayers will be higher rate taxpayers, highlighting the continued impact of tax hikes. Though a long-term Tory tax-cutting agenda may become feasible with decent growth, factors like public infrastructure, debt reduction, climate goals, and upfront investments for reforms make a steady or rising tax burden more likely.
Labor’s Alternative Approach
Labour sees its reputation for economic prudence as the key to gaining power. Keir Starmer’s refusal to pledge to lift the two-child limit on welfare payments reflects this commitment to fiscal rectitude and tough decision-making. However, many within the Labour party believe that such austerity measures may not be sustainable once in power. The party will likely seek alternative means of funding if pledged not to raise income tax, VAT and social security rates.
Potential sources of funding may include taxes on assets or investments and the removal of higher tax breaks. However, a fiscally responsible approach may lead to a new Labour chancellor admitting that the economic situation is worse than expected.
Closing Thoughts
In the upcoming elections, voters will face the reality of both major parties reporting high taxes without any immediate expectation of addressing the issue. The Conservatives will talk about major savings they cannot deliver, while Labour will emphasize reform that allegedly comes at no extra cost. Despite the honesty and transparency needed in discussing taxation, voters have rarely rewarded such openness.
Summary
Based on current trends and economic forecasts, it is unlikely that the UK tax burden will decrease in the near future. Both major political parties, the Conservatives and Labour, face significant challenges when it comes to implementing low-tax options and reducing the tax burden for British voters.
The key factors contributing to the potential rise in the tax burden include sluggish economic growth, revenue challenges, rising costs associated with high levels of debt, and the UK’s aging society. While both parties may promise future growth and reshaping the economy, the practicality of significantly reducing the tax burden remains limited.
The Conservative party may argue that taxes will be lower under their governance compared to Labour, but the pressure on tax revenues will persist regardless of the party in power. The need to curb debt makes tax cuts contingent on spending cuts, and until trend growth exceeds two percent, there is little room for maneuver.
Labour is positioning itself as the party of economic prudence, aiming to demonstrate fiscal rectitude and tough decision-making. However, the sustainability of austerity measures and the party’s commitment to reform without additional spending remain questionable in the long run.
While both major parties may report high taxes, British voters should be aware that immediate solutions to address the tax burden are challenging to achieve. It is essential to consider the broader economic landscape, expenditure commitments, debt reduction, and the potential impact of reforms on growth before setting high expectations for tax cuts.
Ultimately, the future of the UK tax burden relies on sustained economic growth, effective fiscal policies, and a comprehensive approach to reshaping the economy. Without these elements, the tax burden is likely to remain steady or even increase over time.
If you have any further questions or would like to discuss this topic in more detail, please reach out to robert.shrimsley@ft.com.
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Here is an economic forecast. There will be no credible low-tax option for British voters in the next election. Whatever the leaders may say, there is no short-term strategy that will reduce the rising tax burden.
This is not the impression that neither of the two parties with the possibility of forming the next government (for the sake of argument I include the Conservatives) wants to convey. Both insist that taxes are too high and that public spending is unsustainable. Conservatives may be dreaming of following their trusty handbook of promising a tax-cut program. There may even be a “down payment” before the election, though not enough to undo other raises.
Labour, determined to prove the economy can be trusted, will pledge big to meet Tory tax policies in its early years apart from a few small measures, knowing those plans see the tax burden continue to rise, to 37.7 % of gross domestic product, by 2027/8.
Both will talk about reshaping the economy and promise future growth. However, neither will be able to significantly affect the tax burden at least until the last years of the next parliament.
Historically, parties have squabbled over how to balance the proceeds of growth between spending and tax cuts. The next government will not have this luxury. The best either side can realistically offer is a reform spurt that leads to higher growth and facilitates happier choices. And while some growth-enhancing reforms may cost little, for example for the planning process, others require upfront investment and are unpopular. Even with a large majority, the Conservatives were fearful of planning reform.
Conservatives can conceivably argue that taxes will be lower under them than under labour. However, whatever tactics are adopted before the election, the pressure on tax revenues will not ease after.
In addition to the UK’s stubbornly low growth, serious revenue challenges are highlighted in this month’s Office for Budget Responsibility’s fiscal risks report. More immediately concerning is the UK’s exposure to the costs that come with its high levels of debt. Risk is not only less favorable market sentiment, but also the rising cost of servicing that debt. Interest payments they were £9.8bn in April alone, although inflation also increases tax revenues. Rishi Sunak will want to reinstate the target of reducing a debt-to-GDP ratio that stands at 100% of GDP.
Other issues include an aging society, imposing a higher tax burden on a relatively small number of workers. The UK is locked into growing aid commitments to pensioners, via the triple-block income guarantee that neither side feels able to withdraw from. The OBR states that this, together with the loss of fuel tax revenues with the switch to electric vehicles, the costs of decarbonisation and commitments to increase defense spending, will pose a £66bn challenge by 2030.
The need to curb debt means that tax cuts require spending cuts, but conservatives have lost their taste for serious downsizing. In the short term, spending cuts may pose a greater risk to growth than high taxes. Until trend growth is reliably above two per cent, there is little room for manoeuvre.
Tory tax hikes will continue to be felt through 2027/8. The Institute for Tax Studies describes it Sunak’s six-year freeze of income tax thresholds as “the biggest tax-raising measure since the 1970s.” By 2028, around 14% of UK taxpayers will be higher rate taxpayers, up from 3.5% in 1991/2.
With decent growth, a long-term Tory tax-cutting agenda becomes feasible. But the state of public infrastructure, the desire to cut debt, raise public sector pay with reduced immigration, meet climate goals, and the cost of upfront investments to fuel reforms preclude anything but a steady or rising tax burden. until then.
Labor sees its reputation for economic prudence as the key to unlocking Downing Street. There must be no unfunded commitments. Keir Starmer’s current battle with Labor over his refusal to pledge to lift the two-child limit on welfare payments is intended to demonstrate his fiscal rectitude and his willingness to make tough choices. But few Labor figures believe it is a tenable position in power and even fewer think his commitment to reform is an alternative to spending more. In a recent article, Starmer wrote that Britain demands reforms “rather than just more money,” a phrase that doesn’t really preclude extra spending.
Assuming both sides re-commit not to raise income tax, VAT and social security rates, Labor will be forced to seek its extra funding elsewhere. Potential targets include taxes on assets or investments and the removal of higher tax breaks. It doesn’t take a psychic to imagine a new Labor chancellor sadly declaring that after looking at the books, he has found that things are worse than expected.
In elections, therefore, voters will find two parties reporting high taxes but with no immediate expectation of addressing them. Conservatives will talk about major savings they can’t offer; Labor will underline reform that comes at no extra cost.
It would be nice to think that the parties can be honest about what awaits them. But voters have rarely rewarded honesty when it comes to taxation.
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