Why UK taxes look set to remain high as public services continue to struggle – John McLaren

Chancellor Jeremy Hunt has done some serious tax raising since the Liz Truss debacle but important public services like the NHS are struggling to stand still

As the March 6 UK Budget approaches, there continue to be loud mutterings over tax cuts prior to the next general election, but how realistic is this and would they last? The short answers are “not very” and “no”. The reasons for this were helpfully laid out in recent analysis by the Institute for Fiscal Affairs (IFS) and the International Monetary Fund (IMF).

The IFS stated: “The UK finds itself in an unfortunate economic and fiscal bind. Living standards have endured an unprecedentedly long stagnation. Taxes are at record levels for the UK. Public services are showing visible signs of strain. Further tax rises and further cuts for most public services are built into current plans. But on official forecasts, this is only just enough to stabilise government debt as a fraction of national income.”

Meanwhile, the IMF’s view of the UK’s position is that “there is a need to put in place medium-term fiscal plans that will accommodate a very significant increase in spending pressures. In the case of the UK, you might think of spending on healthcare and modernising the NHS, spending on social care, on education, you might think about critical public investment to address the climate transition, but also to boost growth. And so it's very important to have in place medium-term fiscal plans that accommodate these pressures, at the same time ensuring that debt dynamics remain stable and contained. And so that requires a combination of tax and spending measures to make sure that you can allocate the resources when they need to be allocated, but at the same time preventing your debt levels from increasing. And in that context, we would advise against further discretionary tax cuts as envisioned or discussed now.” Pretty unequivocal.

Chancellor Jeremy Hunt is under pressure to deliver tax cuts ahead of the general election expected this year (Picture: Dan Kitwood/Getty Images)

Tokenistic tax cuts

Put together, these two opinions emphasise the difficult position that any UK Government, and by association the Scottish one too, finds itself in. At the UK level, taxes are high, as are debt levels, but public services are struggling to even stand still, nevermind deal with a variety of Covid-related backlogs. The root problem remains a lack of economic – for which read productivity – growth which in turn would lead to faster growth in tax revenues. Without such growth, the most obvious way to stop public services further declining, while capping or reducing debt levels, as both major UK parties have advocated, is to raise taxes.

After the Liz Truss, tax-cutting Budget debacle, Jeremy Hunt has done some serious tax raising – on corporation taxes and, crucially, through the use of fiscal drag, by freezing tax bands at a time of high inflation, but to little avail in terms of improving services.

While some tokenistic tax cuts, for pre-election purposes, may arise, they cannot survive for long. Until decent economic growth rates return, there is just no getting round this. Sure, you can plan to introduce public sector reforms that will improve efficiency but this will take time and the record on these reforms delivering is not good. Furthermore, if you are trying to boost economic growth then cuts in public sector investment are a clear hindrance while the opposite approach, boosting investment, would provide a helping hand.

So what is the answer? Frankly, there isn’t one. Germany, the Netherlands and Japan find themselves in similar situations at present, with few – notably the US, Canada and Australia – doing clearly better. That means you have to accept the situation and budget accordingly, not on a wish-fulfilment basis.

Scotland’s growing social security bill

It may be that a higher tax-burden state emerges, or it may be that, after a certain point, the electorate decides that some services will have to be downgraded or cut. But with much of the existing pressure coming from the health service, social care and defence, it’s difficult to see how a substantial downgrading can be achieved without it seriously hurting. For example, a recent OECD study had UK tax revenues growing by an average of 1.5 per cent a year over the period 2023-2040, significantly lower than the expected growth in health spending, 2.1 per cent a year.

At the Scottish level, the situation is exacerbated by funds being siphoned off into the social security budget. As the Scottish Fiscal Commission recently explained, “spending on social protection, which covers the devolved social security payments, is the only category with steady and rapid growth, increasing in real terms by 28 per cent between 2022-23 and 2024-25”.

This budgetary choice may have a laudable aim – to alleviate poverty – but it has consequences. To wit, the further restricting of funds to other budgets. Thus, the day-to-day spending budget for health in Scotland is flat in real, inflation-adjusted, terms – from 2022-23 to 2024-25 – and is actually falling once capital spending is included.

Managed decline

There have also been harsh cutbacks in economic support measures, which again have ramifications for trying to reinvigorate productivity growth. Avoiding any UK tax cuts, if they relate to income tax, would not really help the Scottish position, but rather just mean that there was no extra pressure on top of what already exists.

Back at Westminster, if Labour do get elected, then they face some tough choices. The most honest course would be to say, yep taxes will have to be higher to try and solve some of our problems – be it declining service standards, extended NHS waiting lists, underfunded infrastructure or whatever.

They might claim that, with a fair wind, this will be a temporary position, but without some form of tax hike they will find themselves in the same position as the current Tory government, overseeing the managed decline of public services within a high tax environment.

John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for a variety of economic think tanks