Budget: Why a high-tax country is still dealing with fraying public services

Britain is on course to shoulder a tax burden that has “never been sustained before in its history” but is still grappling with fraying public services, a top economist has told City PM ahead of Chancellor Jeremy Hunt’s budget tomorrow.

Carl Emmerson, deputy director of the Institute for Fiscal Studies (IFS), said the UK has become a “higher tax country and yet we still see many challenges on the spending side”.

The Chancellor is wrestling with trying to balance the country’s public finances while maintaining strong public services ahead of his first proper budget.

NHS waiting lists have swelled over the past year and public sector workers have launched a wave of strikes in response to the government refusing to raise public sector pay, which has been eaten up by inflation racing to a multi decade high of 10.1 per cent.

A deterioration in the UK’s public services delivery comes despite the tax burden being on track to hit its highest level since the turn of the Second World War.

Under the Tories’ current spending plans, most government departments will suffer real terms spending cuts in the coming years, which comes after years of budgets being squeezed during the Cameron-Osborne austerity era in the 2010s.

A poor long-term growth outlook and higher interest rates are poised to squeeze the amount of cash Hunt has to play with tomorrow to around £9bn.

Although the economy is performing much better than experts forecast at the turn of the year, handing the Chancellor some short-term cash to play with, low GDP growth means Hunt is unlikely to announce any permanent tax cuts or spending rises this week.

Such measures would be “hard to justify,” Emmerson said, adding that the UK’s “terrible growth makes all the trade offs a lot more difficult”.

Britain’s official forecaster the Office for Budget Responsibility is expected to downgrade its projections for GDP growth beyond this year on Wednesday, wiping off most of the windfall Hunt has received from spending less than expected on the £2,500 energy price cap.

That downgrade means the margin for error Hunt has to meet his fiscal targets – getting debt as a share of the economy down and capping borrowing at three per cent of GDP in five years – is likely to be wafer thin.

Just back in November, he was only meeting those targets by a margin of around £9bn despite signing off on £55bn of tax rises and spending cuts.

Business groups have urged the Chancellor to soften the six percentage point corporation tax hike to 25 per cent by offering tax reliefs on investment spending, a move intended to be a watered down temporary successor to the 130 per cent super deduction created by Prime Minister Rishi Sunak when he was Chancellor.

“The increase in corporation tax is big… it’s a risky thing to do,” Emmerson said.

Critics of the rise claim it will reduce business investment in the UK by increasing the amount of profit companies have to hand over to the Treasury. It is forecast to raise around £15bn for the government in five years.

Speaking to the BBC’s Laura Kuenssberg show over the weekend, Hunt said the government “will always look to reduce the tax burden… within the bounds of what is responsible”.