Taxes are going up – but there are plenty of reasons to be cheerful

We are facing the highest sustained level of taxation in peacetime, writes Hamish McRae, but decent growth should make the burden more acceptable

Taxes are going to rise to their highest level for at least 40 years (Getty/iStock)

Taxes are going to rise to their highest level for at least 40 years, but there will still not be much more money for public services. So what should we make of this?

The Institute for Fiscal Studies produces a “green Budget” report just before the official Budget, which this year comes on 27 October. It is a cool, dispassionate, apolitical assessment of the choices before the UK government, and this time it makes troubling reading.

The headline is, “Despite planning biggest tax rises for more than 25 years, and an historic increase in the size of the state, the chancellor is still likely to have little money for hard-pressed public services”. The detail is, if anything, even more glum. The highest sustained level of taxation in peacetime. Spending at the highest level in “normal times” since 1985. And to balance the budget (or at least to cut the deficit to a sustainable level) Rishi Sunak may not only have to increase some spending by less than projected, but may actually have to cut some programmes.

There is a temptation, when faced with such a wall of gloom, to switch off. Haven’t governments always said they are short of money, but always seem to find it for projects they favour – or at least, for those they think are likely to get them re-elected? Add in the current wave of supply-chain disruption and surging energy prices, and the whole thing becomes bewildering. Can things really be as bad as this, and if so, why on earth is our prime minister so upbeat?

So to try to put this report, but more importantly the real Budget in two weeks’ time, into perspective, here are five thoughts.

One, the UK is a bit below the middle of the pack in terms of the size of its public spending as a share of the total. The IFS thinks spending will settle at 42 per cent of GDP. That would compare with pre-pandemic rates of 38 per cent for the US, 39 per cent for Japan, 42 per cent for the Netherlands, 45 per cent for Germany, 49 per cent for Italy and 55 per cent for France. By European standards we would still not need to be particularly highly taxed to pay for this spending.

Two, one of the reasons why there is a squeeze on spending is demography: the ageing of the developed world. But actually, the UK is relatively youthful compared with most other similar countries. We are getting older, but getting older more slowly than most, so to speak. If you take the proportion of the population over the age of 65 as a yardstick, Japan has 28 per cent, Italy 23 per cent, Germany 21 per cent, France 20 per cent, and the UK 18 per cent. Only the US is materially younger, with 16 per cent.

Three, that age profile bodes relatively well for the future. Younger people help create economic vibrancy – they start businesses, they come up with innovative technologies, they lift the productivity of the companies they work for, and so on.

Four, skilled immigrants contribute enormously to economic growth, and the UK seems to have retained its attraction as a magnet for talent. According to a House of Commons briefing paper this spring, net migration into the UK has remained high, notwithstanding some European citizens deciding to leave following the Brexit decision – and more as a result of the pandemic. It is expected that between 123,000 and 153,000 people will arrive from Hong Kong this year.

Finally, the UK has scope for increasing its productivity – ultimately the only way to increase real living standards. A Commons briefing paper last week reported that, while the UK has higher productivity than Italy, Canada and Japan, it is much less efficient in its use of labour than France, Germany and the US. The government’s levelling up initiative may or may not succeed. You can’t make an entire country more productive by a government proclamation. But the potential is there for a step change in economic performance.

None of this means that the chancellor’s task is easy. None of it means that we won’t have to pay more tax. But decent growth will make the burden more acceptable. Think of it this way. In a decent year, the economy will grow by at least 2 per cent – it has done so over the past 200 years. A 2 per cent increase in the share of GDP being paid in taxation is equivalent to one year’s growth. So we lose a year’s progress in terms of living standards – but only one year. What we can reasonably ask of this government, indeed all governments, is that they spend that additional money wisely.