Britain must choose between decades of higher taxes and cutting back welfare state, top economist warns

Exclusive: Britain must address an annual spending black hole of around £60bn in the years ahead, according to the IFS

Britain’s ageing population would force politicians to choose between the approach of other Western European countries or cut back basic education, health and social care services (ALAMY)

The UK must choose between higher taxes for the next 20 years or stripping back the welfare state as it faces a spending black hole of £60bn each year, the head of the Institute for Fiscal Studies (IFS) has told The Independent.

Paul Johnson, director of the economic think tank, said Britain’s ageing population would force politicians to choose between the approach of other Western European countries – increasing taxes by another 2-3 per cent of national income – or cut back basic education, health and social care services.

He said: “In the next 10 to 20 years, taxes will have to rise further unless we collectively agree that we’re happier with less of a welfare state than we currently have.”

Based on 2020 figures, generating a further 2-3 per cent of national income in tax would mean around an extra £60bn for public finances. However, given of the economic impact of Covid-19 restrictions on national income at the start of the pandemic, the figure could prove to be higher in years to come.

It comes as the government works to address the NHS waiting list backlog, which has reached a record high of 6 million in England. These lists are unlikely to come down until 2024, the government said this week.

Higher taxes have also become an especially sensitive issue amid mounting pressures on household finances.

From April, the government will introduce a tax rise via National Insurance Contributions which will be known as a Health and Social Care Levy. The increase, equivalent to around 10 per cent for many earners, comes as inflation has reached its highest level in around 3 years.

“Unless we find some magical way of not increasing the fraction of national income we spend on these things as not just the population gets older, but the cost of providing healthcare continually rises, that levy’s going to have to keep going up further,” Mr Johnson said.

“We just are going to have a lot more older people over time. They pay less tax and they consume more in the way of pensions and health and social care.”

The average household faces an increase in energy bills of around £700, though the government has sought to mitigate the immediate hit from this rise. Roughly 80 per cent of households will qualify for a £150 council tax rebate in April and a loan of £200 in October, repayable from 2023 onwards.

Meanwhile, the Bank of England has said it expects disposable income for households to be squeezed by 2 per cent this year – the biggest hit on record.

For decades, the UK has been able to avoid choosing between the welfare state and higher taxes by trimming its budgets in other areas of public spending, most notably defence, Mr Johnson said. However, after 15 years of not raising key budgets such as those dedicated to education there is no longer any room to hide.

“You go through all the big bits of spending and it is hard to see how you can cut those back. I find it hard to imagine a world in which we’re not going to be taxing more over the next couple of decades,” he said.

But by international standards, particularly those of European peers, the UK is still a “relatively low tax” country: “Economically we know another 2-3 per cent tax on national income is manageable because lots of other countries do it. You can certainly run a decent economy on that basis.”

Still, the political case will be hard to make for those looking to win support from the middle classes, Mr Johnson said.

“I don’t believe you can get all of that from taxing rich people and big companies. I mean, this will affect average people, which is what you do see in pretty much every country with a higher tax burden than us. Mostly coming from middle earners rather than coming from multinationals.”