Tax set to rise to highest share of UK income in over 30 years as austerity continues to bite according to Institute for Fiscal Studies
The amount of tax we pay will rise to the highest proportion of the UK’s national income in over 30 years, according to an analysis by an influential group of economists.
The government plans to raise taxes by £17bn over the course of this Parliament relative to 2015-16, according to the Institute for Fiscal Studies (IFS), ahead of chancellor Philip Hammond’s first budget on 8 March.
This means 37 per cent of national income will go to tax by 2020, the highest point since 1986-87, when Margaret Thatcher was Prime Minister.
Read more: The apprenticeship levy – little more than a stealth tax?
Meanwhile government spending will fall by four per cent in real terms over the next three years as austerity continues to drive fiscal policy.
Paul Johnson, director of the IFS, said: “For all the focus on Brexit the public finances in the next few years look set to be defined by the spending cuts announced by George Osborne. Cuts to day-to-day public service spending are due to accelerate while the tax burden continues to rise.”
Hammond will meet the fiscal targets he set in November’s Autumn Statement, says the IFS. He previously relaxed the stricter rules of his predecessor, George Osborne, to aim instead for a deficit below two per cent of GDP by 2020-21.
However, to eliminate the deficit in the next Parliament the government will need to cut a further £34bn.
The deficit in government spending will still be higher than many years before the financial crisis, and will be the fourth highest of 28 advanced economies, says the IFS.
This would come on top of a real government spending cut of 10 per cent, the longest and biggest expenditure fall ever, according to the IFS.
Read more: Would leaving the Single Market severely damage the UK economy?
The cuts come against a backdrop of lower GDP growth, according to forecasts from Oxford Economics made in conjunction with the IFS analysis.
Growth will slow to 1.6 per cent this year according to the forecast, significantly less than the Bank of England’s latest estimate of two per cent.
Higher inflation will weigh on real earnings growth, which will plunge from 1.7 per cent to 0.2 per cent as price rises outpace wages.
Andrew Goodwin, lead UK economist at Oxford Economics, was scathing about the government’s approach to Brexit. He said: “We think the goverment’s chosen path for Brexit is in fact one of the most economically damaging.”
The fall in the value of sterling will put significant pressure on consumers, who have been resilient in the aftermath of the Brexit vote, surprising economists.
“With spending power set to come under significant pressure from higher inflation and the welfare squeeze, the consumer will not be able to keep contributing more than its fair share,” he said. “Exports should be a bright spot, but overall a slowdown in GDP growth appears likely.”