OBR misery makes tax rises inevitable
The OBR’s dire fiscal risks report portrays a world in which the only possible solution to Britain’s economic state is tax rises, says Emmanuel Igwe
In ancient Greece, devotees trekked to Delphi to be told in ambiguous prose by the Pythia that chaos was nigh and only sacrifice to Apollo could hold off punishment. These days, it has become a grim summer tradition every July to anticipate the OBR descending from Petty France to deliver its oracle on Fiscal Risks and Sustainability, as they duly did this month.
The message was predictably gloomy: Britain’s debt is spiralling; the markets are anxious about our economic prospects and a heavier tax burden is inevitable. As Britain’s newest Prime Minister, Andy Burnham now inherits the oracle and its curse.
In its latest report, the OBR warns that debt will rise to 300 per cent of GDP by the 2070s if there is not fiscal tightening of 3.8 per cent of GDP by 2031-32 – that’s the size of onshore corporation tax or total expenditure on education by 2030-31. If fiscal tightening is delayed until 2050, the bill increases to eight per cent of GDP, equivalent to the amount spent on health. For media folks in the Guardian and the Telegraph, the only solution here is for the government to tax us more.
Unsustainable debt has been the sombre prophecy for quite some time. We see it in some ambiguous form in similar reports in 2021, 2022, 2023, 2024 and 2025. Last year, we read the bombshell that borrowing was three percent above GDP despite the highest tax-burden inflicted on the taxpayer in peacetime. In all the years of the OBR’s existence, despite its unfulfilled projections inspiring persistent tax hikes, prospects for Britain’s economic growth only seems to recede like Zeno’s tortoise.
In the last financial year, Brits paid £1.23 trillion in taxes to the Exchequer. The tax burden is projected to rise from its current weight of 36.3 per cent of GDP to 38.5 by the end of the decade. Professor David Miles of the OBR is right to say that Britain is moving in “uncharted territory”, as further taxes will only erode future growth. In a coy sleight of hand, the OBR provides the medicine but warns that the patient cannot handle its bitterness.
From the commentary, one might presume that the OBR explicitly stated that the government must raise taxes, but they steer clear of such a direct recommendation. However, they portray a world in which the only possible solution to Britain’s dire economic state is tax rises. Major reforms or cuts are off the table. The triple-lock is assumed as a permanent fixture, health spending can only ever be on an upward trend, and primary expenditure will only rise from its current proportion of 40 percent of GDP to 49 per cent in 2070. Spending is an uncontrollable natural event, leaving taxes as the only lever that can be pulled. The conclusion writes itself before the modeller hits run on his statistical package of choice.
We have seen the consequence of such logic when the OBR admitted in 2024 that its assumption that all immigration was a net gain to the Exchequer was far from the truth. In fact, while it maintained that each new arrival over 25 was a positive contribution to economic growth, when demarcated by wages, low-wage immigrants were found to be a net lifetime cost – especially when incidents such as indefinite leave to remain (ILR), dependents, and benefit eligibility are factored in. This reality becomes starker as the timeline for migrants that arrived during the Boriswave approach their five-year mark, when they can obtain their ILR visas which will make them eligible for benefits and the opportunity to bring in dependents, as we are beginning to see.
Egregious
More egregious is the growing status of constitutional writ conferred upon these reports. The fiasco last year that led to the resignation of the last OBR chair, Richard Hughes, reflected the oracular heft OBR reports now hold both in the palaces of Westminster and the trading floors across the City. Government budget statements are no longer an expression of its will to fulfil its mandate, but a petition to the market with the grace of the OBR.
Jeremy Warner of the Telegraph would have Andy Burnham raise taxes to cover funding gaps now he is the prime minister. But as my colleague Mathew Bowles has written in The Critic, Burnham’s toolbox is empty. With a manifesto that foreswore tax increases on VAT, income tax, and National Insurance, every tool for his interventionist kit has been pawned, especially given that government debt is already at 100 per cent of GDP, and debt interest alone is currently at £110bn per year. One cannot fully blame Mr Warner for his proposition; with spending assumed to consistently increase in OBR models, the simple logical deduction is to tax more.
Although Burnham has pledged to uphold the labour party’s manifesto that rules out tax rises on broad-based taxes, the problem of funding his spending plans persists. So far, he has declined to dismiss a wealth tax and has suggested that the country may need to “ask for a little more” to balance its books. His instincts on tax inclines towards fewer taxes on labour and more on assets. This means potential higher business rates on warehouses and raising capital gains taxes to align with income tax rates. This would further increase living costs for households and make the business environment more challenging.
“There is a great deal of ruin in a nation”, Adam Smith wrote to cheer a young friend worried about Britain’s economy in the eighteenth century. Rather than cheering us however, latest OBR figures may have put their finger on just how much ruin Britain has left.
Emmanuel Igwe is an economist at the Prosperity Institute