Tory public service pledges and corrective measures after austerity pushed tax burden up
The Institute for Fiscal Studies’ analysis that the UK’s tax burden is the largest since the Second World War puts into historical context what has been clear since Boris Johnson became prime minister.
Taxes have been rising sharply, either by stealth or declared policy, to keep up with election promises and demand for public services starved of investment during the previous decade.
Calculated as a share of GDP the tax take will have risen to 37% by the next election, a 4% increase since 2019 and a figure not seen since the 1940s.
By international standards, the UK taxpayer is not particularly heavily burdened. In Europe we pay more tax than Swiss and Irish citizens, but far less than the Germans, French and Scandinavian nations.
But historically this is a high, a reflection perhaps of the demands of an electorate that routinely says it wants to pay less tax (who doesn’t) but also wants high levels of public service.
While every one of the five Conservative chancellors since 2019 has consistently said they want to cut taxes they have done the opposite (with the exception of Kwasi Kwarteng, who was sacked and saw his plans abandoned three weeks after making them).
Increased government spending
The demands of tackling COVID-19 and the decision to bail out every household in Britain during the energy crisis have not helped keep a lid on spending and motivated some tax rises, but they are not, the IFS say, the largest drivers.
Rather it has been meeting pledges to spend more on the NHS, increase the number of police officers and so on, that have driven the tax take ever higher.
Rishi Sunak instituted many of the most significant while chancellor, and has rubber-stamped several more as prime minister. Corporation tax was increased from 19% to 25% this year, a measure announced by Sunak in 2021.
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‘Pandemic is to blame’
He was also responsible for the “stealth” element of our rising tax bills, the freezing of the thresholds for tax and National Insurance – the level at which we pay the various rates, which usually rise in line with inflation.
Wage inflation means many more people have been dragged into higher tax brackets, raising around £40bn for the exchequer, almost double the headline tax cuts announced at the last budget according to the IFS.
Windfall taxes on energy companies complete the set of measures that will amount to £100bn more in tax receipts than had the burden remained at the pre-2019 level of 33%.
The increases are also in large part a corrective to the austerity policies of David Cameron and George Osbourne, during which the UK tax take grew far less than in comparable economies also adjusting to the aftermath of the financial crash.
Given the IFS measures the tax burden as a percentage of GDP, delivering growth would be a way of cutting the tax burden.
That was Liz Truss’ plan, though the execution crashed the bond market and international confidence in the UK.
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Some good news
There was a sliver of a glimmer of good news on that front with the ONS upgrading GDP in the first quarter of this year, and all of 2022 by… 0.2%.
The current Chancellor Jeremy Hunt said the revision “proved the doubters wrong” but while it is of course welcome, it’s not enough to change the overarching narrative of stagnant economic progress in the last decade.
Even if growth were revised upwards by 2% next year, the IFS says it would still leave the tax burden at 36.6%, an increase of 3.5%, still the largest since the 1940s.
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The average two-year mortgage rate has fallen below 5% for the first time since the Liz Truss mini-budget.
The interest rate charged on a typical two-year fixed mortgage deal is now 4.99%, according to financial information company Moneyfacts.
It means there are more expensive and also cheaper two-year mortgage products on the market, but the average has fallen to a near three-year low.
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Not since September 2022 has the average been at this level, before former prime minister Liz Truss announced her so-called mini-budget.
The programme of unfunded spending and tax cuts, done without the commentary of independent watchdog the Office for Budget Responsibility, led to a steep rise in the cost of government borrowing and necessitated an intervention by monetary regulator the Bank of England to prevent a collapse of pension funds.
It was also a key reason mortgage costs rose as high as they did – up to 6% for a typical two-year deal in the weeks after the mini-budget.
Why?
The mortgage borrowing rate dropped on Wednesday as the base interest rate – set by the Bank of England – was cut last week to 4%. The reduction made borrowing less expensive, as signs of a struggling economy were evident to the rate-setting central bankers and despite inflation forecast to rise further.
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Bank of England cuts interest rate
It’s that expectation of elevated price rises that has stopped mortgage rates from falling further. The Bank had raised interest rates and has kept them comparatively high as inflation is anticipated to rise faster due to poor harvests and increased employer costs, making goods more expensive.
The group behind the figures, Moneyfacts, said “While the cost of borrowing is still well above the rock-bottom rates of the years immediately preceding that fiscal event, this milestone shows lenders are competing more aggressively for business.”
In turn, mortgage providers are reluctant to offer cheaper products.
A further cut to the base interest rate is expected before the end of 2025, according to London Stock Exchange Group (LSEG) data. Traders currently bet the rate will be brought to 3.75% in December.
This expectation can influence what rates lenders offer.
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