UK’s tax burden on course to hit highest level since Second World War
The UK is “charting new ground” as its tax burden is on course to hit the highest level since the Second World War.
The tax burden is expected to reach a post-war high of 37.7% of GDP in 2027-28, according to the Office for Budget Responsibility (OBR).
The OBR said this includes the highest ratio of corporation tax receipts to GDP since the tax was introduced in 1965.
Helen Miller, head of tax and deputy director at the Institute for Fiscal Studies (IFS) said: “While this was not a tax rising budget, previous policies mean that tax revenues continue to rise to their highest ever level.
“This is charting new ground for the UK, but is not unusual internationally.”
The OBR’s document, released to coincide with Wednesday’s Budget, said: “The tax burden now rises to 37.7% of GDP (gross domestic product, or the total value of the economy) in 2027-28, which would be a post-war high and is 4.7 percentage points above where it stood before the pandemic (in 2019/20).”
The forecast reflects both pre-existing trends and subsequent changes, the OBR said.
It highlighted stronger receipts from income tax and national insurance contributions, VAT, corporation tax, and capital gains tax, partly reflecting stronger-than-expected growth in wages and nominal consumer spending.
Ongoing freezes to income tax thresholds generate fiscal drag – where earnings growth pushes people into paying more tax.
While the UK tax burden is currently high by historical standards, it has remained below averages across other advanced economies, the OBR said, adding that there is considerable variation across countries.
In the mid-1960s, the UK’s tax burden was relatively high, due in part to the need to finance the UK’s larger stock of debt left by the Second World War.
Tax continues to rise to its highest ever level, and to much higher levels than in recent decades. pic.twitter.com/UvxtK4zjxW
— Institute for Fiscal Studies (@TheIFS) March 16, 2023
Between 1965 and 1980, the UK’s tax burden was volatile, reflecting the “stop-go” fiscal policies of the era, the OBR added.
From the 1980s to the mid-1990s the UK tax burden headed downwards, largely reflecting a fall in taxes on income and profits and a sharp fall in oil and gas revenues, the document said.
From 1996 to 2005 the UK tax burden rose back towards international averages, primarily due to growth in income tax and national insurance contributions receipts.
From 2005 to 2020, the UK tax burden remained relatively stable, as the rate of VAT was raised but the income tax personal allowance was made more generous, the OBR said.
Other high-income economies, particularly Japan, Canada and France, saw growth in their tax burdens, widening the gap between the tax burdens of the UK and rest of the G7, it added.
Like the UK, other countries face growing fiscal pressures associated with ageing populations, higher stocks of debt, higher interest rates, energy insecurity and climate change, and growing geopolitical threats, the OBR said.
It added: “Meeting these pressures while also respecting their own fiscal objectives may require further increases in tax burdens in these countries over the remainder of this decade, unless they are prepared to significantly scale back spending in other areas.”