Britain plans £107bn of tax rises to cut £76bn of borrowing
Britain plans to close a £76 billion borrowing gap over the current parliamentary term with £107 billion of tax rises, the Resolution Foundation said in its analysis of Wednesday's budget — a squeeze delivered entirely through higher taxes rather than spending cuts. The International Monetary Fund praised the deficit-reduction plan this month as the boldest of any Group of Seven nation, but economists warn Chancellor of the Exchequer John Healey is testing how much can be taken from households and businesses before growth suffers.
Past chancellors split the load differently. George Osborne's post-financial-crisis austerity programme divided spending cuts and tax rises 80:20, and his Labour predecessor Alistair Darling planned a 66:34 split. Healey is moving the other way while the tax burden sits at its highest since the Second World War, with living standards under pressure from the energy shock caused by the US-Iran conflict. Oxford Economics analysis by lead economist Adam Slater found that while consolidation programmes often fail, "the evidence suggests that fiscal adjustments are more likely to succeed if they rely mainly on spending cuts rather than tax rises".
The budget raised taxes by roughly £6 billion a year from 2028 and topped up departmental day-to-day budgets by an average of £3 billion a year. Healey said on Thursday there are no plans to reduce the hundreds of billions spent on welfare each year before the next general election, due in 2029. Labour's manifesto pledge not to raise any of the four main tax rates pushed much of the work into administrative tweaks, including powers to deduct funds directly from debtors' bank accounts. Additional taxes on savers, landlords and banks raised only £2 billion, and the increased bank surcharge is withdrawn after 15 months. The Office for Budget Responsibility judged five of Healey's measures to carry a "high degree of uncertainty".
Shadow chancellor Andrew Griffith attacked the approach, saying it does not reduce borrowing, that total debt has gone up, that it does not properly fund defence and that it does not cut taxes to get the economy growing, adding that instead they are putting up taxes again. Rodrigo Valdes, director of the IMF's fiscal affairs department, said the UK has raised taxes so much there is little left that does not have side effects. "More revenues is not easy," he said. "It distorts at the end of the day." Paul Dales, chief UK economist at Capital Economics, said there is a limit to how much you can squeeze out of households and businesses before crimping economic growth, adding that we may have reached that limit.
Tax receipts climbed to 36% of GDP last year and are on course for 38.6% in 2031-2032, the OBR predicts, against an average of 32.7% between 1997 and the eve of the pandemic in 2020. Most of the increase comes through frozen thresholds dragging millions into paying more as pay rises: a full-time worker on the national minimum wage earning £25,275 is now halfway to the 40% higher rate. Resolution chief executive Ruth Curtice said tax rises since 2020 by both the former Conservative government and the current Labour one partly explain the collapse in living standards this decade. Real household disposable incomes are forecast to rise just 1.4% this decade, a tenth of the growth in the 2010s. "The 2020s are on course to have the lowest growth in incomes of any decade on record," Resolution's post-budget report said, "because of rising taxes and import prices."
