Growing fiscal burden in the UK narrows the tax gap with Europe

The UK's rising tax burden has brought government revenues closer to EU levels than at any time in decades. Rachel Reeves plans to accelerate this with huge tax hikes in her first budget on Wednesday.

According to IMF data from 1991, the gap between the UK government's revenue-to-GDP ratio and the EU average is expected to narrow to an all-time low of 6.5 percentage points this year, with the UK expected to shrink to 39.1% and the EU to 45.6%. percent.

The scope is expected to narrow further as Reeves is expected to unveil massive revenue boosting measures as he delivers Labor's first budget since 2010, when the gap between the UK and the EU was 9.1 percentage points.

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Since coming to power in July, Labor has laid the foundations for a budget of massive tax increases to restore public services and strengthen the government's balance sheet. Prime Minister Keir Starmer said on Monday Britain must accept the harsh realities of its finances.

Isabel Stockton, an economist at the Institute for Fiscal Studies, said there was a desire for Britain to deliver public services in line with other European countries and to spend in line with other European countries.

She said she would have to pay for this. Permanently increasing our debt could be a risky strategy, forcing us to be complacent or be taxed more.

March forecasts from the Office for Budget Responsibility, Britain's independent fiscal watchdog, showed Britain's tax burden, a narrower measure of government revenue, would reach 37.1% by 2028-29. This is 4 percentage points above pre-pandemic levels and the highest level globally. Eighty years.

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The figures reflect a series of tax rises from the previous Conservative government, including a freeze on personal tax thresholds starting in 2021 when Rishi Sunak was chancellor. Stockton said the UK has seen a significant increase in tax revenue relative to GDP since the pandemic.

UK government revenues are a smaller share of the economy than the EU and eurozone averages, but are much higher than the weighted average across the G7.

The UK government's revenue as a percentage of GDP this year is also expected to exceed the average of the IMF's basket of 41 developed countries, the most since records began in 2001. Singapore and Korea.

Cristina Enache, a global tax economist at the Tax Foundation, a Washington-based think tank, said an unusually large burden is falling on top earners.

Analysis by the Tax Foundation found that in the UK, the tax burden of high earners earning 167% of average income increased by 2.5 percentage points between 2000 and 2023.

On the other hand, during the same period, the tax burden on average earners decreased by 1.25 percentage points. For low-income earners earning 67% of the average wage, it fell further by 2.35 percentage points.

Increasing the tax burden on high earners could discourage workers from seeking additional income or working extra hours. High-income earners are more mobile than average- and low-income earners, and higher tax burdens may motivate them to move to lower-tax jurisdictions, Enache said.

But Starmer argued that as Britain attempts to improve its finances and public services, those with the broadest shoulders must bear a greater burden.

The growing tax burden has been compounded by the expansion of the public sector, even after special measures launched during the pandemic were phased out.

The IMF estimates UK government spending, which measures the size of the country, will be 43.4% of GDP in 2024, higher than the 10-year pre-pandemic average of 41.2% and closer to the EU average of 48.8%.

Economists said the trend would be difficult to reverse due to an aging population, rising demand for the NHS and other public services and rising debt interest payments.

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At the same time, Reeves must address chronic budget deficits that are broader than those seen in many other developed countries.

The UK has not had a fiscal surplus since 2001, which has led to rising debt or accumulating deficits over time.

The IMF forecasts that the UK's total government debt will be 101.8% of GDP in 2024, an increase of 16 percentage points from 85.7% in 2019.

The EU and eurozone recorded much smaller increases (about 4 percentage points) at 83% and 88% of GDP over the same period, according to IMF data.

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Holger Schmieding, an economist at Berenberg Bank, noted that although many euro zone members have often failed to comply with the region's fiscal rules, the need to justify deficit excesses to Brussels has limited the euro zone's fiscal support.

This helps the region remain better off than in Britain, where each new prime minister typically adjusts the rules as he sees fit, he said.

In the early 2000s, Britain's public debt was half that of the entire Eurozone, but has since increased by 67 percentage points compared to Germany's 5 percentage points.

Further increases are expected as Reeves attempts to reverse a planned decline in public investment as a percentage of GDP.

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Reeves announced changes to Britain's fiscal rules in the budget that will free up tens of billions of dollars of additional borrowing space for investment in the hope that they will help boost the country's growth potential.

Economists say the need for further capital spending is urgent as England remains bottom of the international league table.

The budget comes two weeks after the IMF's fiscal monitor warned that debt was growing at a faster rate than before the pandemic in countries including Britain and the United States. Delaying the adjustment will only make the necessary adjustment larger, the IMF warned.

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On Wednesday, Reeves will try to understand that challenge. She told the FT this month that she wanted to clean up everything about fiscal policy.

She will achieve this by raising taxes on businesses and the wealthy. Ben Nabarro, Citigroup's U.K. economist, said her tax hikes would come on top of the $23 billion already in place due to fiscal problems and other measures implemented by the last government.

Whichever way we cut, this will be generational fiscal austerity.

Data Visualization by Alan Smith and Keith Fray

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