UK’s Next Government May Find Tax Rises Hard To Avoid: Report
Britain's next government will almost certainly need to raise taxes and make unwelcome spending choices even if this week's budget update from Finance Minister Jeremy Hunt presents a superficially brighter picture.
The country is facing long-term headwinds from an ageing population, chronically weak growth and overstretched public services, amplified by a surge in borrowing costs.
While many of these challenges are common to other European countries, Britain's near-term growth outlook is especially weak, interest rates have risen more sharply and aspects of its budget planning process make it hard to take longer-term decisions and discourage more prudent policies.
With an election due no later than January 2025, neither the opposition Labour Party, which is currently well ahead in opinion polls nor Prime Minister Rishi Sunak's Conservatives want to talk about higher taxes.
But tax rises will be very hard to avoid for whichever party forms the next government, says James Smith, a former Bank of England economist who is research director at the Resolution Foundation, which focuses on issues affecting low and middle earners.
"Neither party wants to have that conversation openly. They don't want to be the party of raising taxes. But it's inevitable if you want to address the serious problem that we have in terms of public services," Smith said.
Britain's tax burden has already risen sharply. Tax revenue this financial year as a share of gross domestic product is forecast to reach 37 per cent, according to the government's budget office, up from around 33 per cent before the pandemic and the highest since 1948.
However, by European standards the country's tax rate is low. Data for 2021 from the Organisation for Economic Co-operation and Development showed Britain was the lowest among major European countries, well below France's 45 per cent or Germany's 40 per cent.
Most of the recent increase has come through "fiscal drag", where exemption thresholds for income tax and other taxes have not risen in line with wages or inflation, which hit a 41-year high last year.
With inflation set to fall, Britain's next government will gain less from this comparatively easy option.
For earlier governments, the main way to increase tax levels has been to raise the rate of national insurance - a payroll tax paid by employers and employees - and, in the Conservatives' case, higher value-added tax.
The Institute for Fiscal Studies (IFS) and the Resolution Foundation both say a future government should look at more ways to tax wealth in addition to income. Residential property taxes, for example, are low compared with many other countries and are only loosely related to current property values.
