UK tax burden at record high - but the government has no money
"We will halve inflation this year."
"We will grow the economy."
"We will make sure our national debt is falling."
If the Institute for Fiscal Studies (IFS) is right then Rishi Sunak is going to struggle to deliver on two of the three pledges he made in January, in time for the next election.
Inflation will fall to 4% by end of this year but the UK is heading for recession and national debt is set to continue rising, according to forecasts prepared for the IFS by Citi.
Last week, in Morocco, the chancellor told ITV News he was going to have to make “difficult decisions” in his Autumn Statement.
Jeremy Hunt denied he wanted to raise taxes in an interview with ITV News last week
In its latest Green Budget, the IFS makes it clear how hemmed in Jeremy Hunt will be on November 22.
The outlook for economic growth (and therefore tax revenues) is weaker than the Office for Budget Responsibility (OBR) was forecasting at the Budget in March.
Inflation is higher than the OBR expected, swelling tax revenues (taxes are levied on cash earnings) but putting a strain on budgets for public spending.
And then there’s the cost of borrowing.
Back in March, the OBR assumed interest rates would briefly peak at 4.25%. That has proved a big miss. Bank Rate stands at 5.25% and markets are betting on it remaining above 5% for at least the next year at least.
The UK’s national debt now exceeds the total value of all the goods and services we produce. Our stock of debt is getting bigger and more expensive to finance.
The IFS calculates that the government will be spending £108 billion a year on debt interest alone by 2026/27.
That’s £20 billion a year more than the OBR forecast in March and £60 billion a year than was projected in March 2022.
Even when you leave aside debt interest, the government is spending more on social security and public services than it was before pandemic. The population of the UK is aging, is a sign of things to come.
In short, things are tight. Very tight.
Carl Emerson, Deputy Director at the IFS, says the chancellor’s priority should be to reduce public debt.
“We know that bad shocks come along and when they do we want to increase debt so we do need to aim to get debt down in good times so we can put it up when the bad shocks hit,” he explains.
“I think it is pretty clear that regardless of whether the (Chancellor meets his fiscal rules or not in the Autumn Statement) we don’t have it on a decisively downwards path.”
The chancellor’s party has seems to have other ideas. A significant minority of Conservative MPs continue to bellow for tax cuts.On one level you can understand. The tax burden is heading higher, to record levels.
Tax thresholds (for income tax and national insurance) were frozen in 2021 and the freeze has since been extended all the way out to 2027/28.
Rishi Sunak’s original intention - he was chancellor at the time - was to raise up to £8 billion a year for the Treasury but sky-high inflation has turbo-charged its effectiveness.
Wage growth has accelerated away along with price growth, dragging millions of people into higher rates of taxation.
The IFS calculates that this “stealth tax” will raise £50 billion a year more for the government by 2027/28.
In four years time, the IFS estimates that 1 in 6 people in the UK will be higher (40%) or additional (45%) income tax payers. Back in the early 1990s, 1 in 20 people were.
The IFS is attempting to explain "how it is we’ve got no money at the same time that we’ve got the highest tax revenue ever," jokes Paul Johnson.
It does so clearly and concisely. And in a way that isn’t very funny.
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