According to the Institute for Fiscal Studies (IFS), the Government is due to oversee the biggest tax-rise since 1948. The IFS forecasts taxes will amount to about 37% of national income by the next general election, due in 2024.
The IFS report
The IFS claims that next year, the Government will collect upwards of £100bn more in tax compared to pre-2019 levels. This is equivalent to around £3,500 more per household though the course the tax rise will not be shared equally.
The IFS report argues that the UK government is currently raising more in tax revenue, as a percentage of national income, than at any time since the 1940s. This is, in no small part, due to a raft of tax-raising measures announced over the past few years. Notable examples include the big increase in the main rate of corporation tax from 19% to 25%, the energy profits levy, and freezes to various income tax and National Insurance thresholds. Economic developments mean that some of these measures will now raise considerably more than originally planned or intended. That is particularly true of freezes to income tax allowances (which would otherwise have risen in line with CPI inflation).
The upshot is that the overall level of taxation will increase by more over this parliament than under any previous parliament since the 1950s (when comparable records began). Between 2019–20 and 2024–25, tax revenues are set to increase by 4.2% of national income under the latest official forecasts (we return to the issue of recent GDP revisions below). The next-biggest tax-raising parliament was during Labour’s first term under Tony Blair (defined here as 1996–97 to 2001–02), when taxes increased by 2.9% of national income.
The IFS director suggested that Britain is still “a relatively rich country”, but claimed “we try and tell ourselves that we can have something like European-style welfare states with something like American-style tax system and of course we can’t.”
Ben Zaranko, a senior research economist at the IFS, said the tax rate was not primarily “a direct consequence of the pandemic”, when government spending surged to keep the economy afloat.
“Rather, it reflects decisions to increase government spending, in part driven by demographic change, pressures on the health service, and some unwinding of austerity,” Mr Zaranko said.
A tax rise
Responding to the report, a Treasury spokesperson said the “most effective tax cut we can deliver” is to “drive down inflation”. Treasury minister Andrew Griffith added that inflation was a priority but refused to rule out further tax rises. “We believe that you need a strong economy, you need to build that on stable foundations which is why bearing down on inflation is so important, that’s been the priority the prime minister has set,” he said.
Meanwhile, new figures from the Office for National Statistics (ONS) show that the economy grew by more than originally thought between January and March. Gross domestic product rose by 0.3% instead of 0.1%. For April to June, however, the ONS left a reading of 0.2% unchanged – putting the economy at 1.8% above pre-pandemic levels. Grant Fitzner, chief economist at the ONS, said the GDP growth rate is “almost unrevised over the last 18 months”.
Chancellor of the Exchequer Jeremy Hunt added “the British economy recovered faster from the pandemic than anyone previously thought” and the new figures prove “the doubters wrong”.
Calls for tax cuts
Some Conservative MPs are putting pressure on Chancellor Jeremy Hunt to reduce taxes in the government’s autumn statement next month. However, Hunt has asserted that tax cuts are “virtually impossible” at present.
Liz Truss and former cabinet ministers in her short-lived, economically turbulent government, launched the Conservative Growth Group in January to push on with her calls to slash taxes and promote radical free-market economic policies. Responding to the report, Ms Truss said: “This unprecedentedly high tax burden is one of the reasons that the British economy is stagnating.”
Opposition parties
Labour said the Tories had presided over 13 years of low growth and stagnant wages. “Brits are working hard but getting clobbered with 25 Tory tax rises and a continuing Conservative premium on their household budgets,” said Darren Jones, the shadow chief secretary to the Treasury.
Moreover, the Liberal Democrats said the Conservatives had “crashed the economy” under Ms Truss and are “making the public pay the price”. “This is the same party which promised not to raise people’s taxes and is now taxing families through the nose,” said the party’s treasury spokeswoman, Sarah Olney.
Final thought
As the Conservative Party conference is due to commence this weekend, the IFS report comes as the party faces increasing internal divisions over the issue of tax.