Govt’s record tax intake to hit highest sustained level in peacetime – IFS

This year’s announcements of tax rises will increase the UK’s tax take to its highest sustained level in peacetime, a report from the Institute for Fiscal Studies (IFS) has highlighted, with spending to settle at 42% of national income.

The figure would be more than 2% above its pre-pandemic level and its highest level in “normal times” since 1985, the report said.

According to the IFS, however, these are the more inevitable consequences of population ageing and pressures on health and care spending, than they are consequences of the pandemic. The Institute added that tax rises that were always inevitable have been “smuggled in” under the cover of the pandemic.

Borrowing is anticipated to run at least £20bn a year below the March 2021 Budget forecast from 2022/23 onwards, the report stated, while the current budget should return to surplus from 2023/24. The IFS is forecasting that debt would then fall, but at 89% of national income in 2025/26, it would still be 17 percentage points of national income above its pre-pandemic share.

IFS director, Paul Johnson, commented: “Rishi Sunak, a Conservative Chancellor, is presiding over an increase in the tax burden to record levels in the UK and an increase in the size of the state – public spending as a fraction of national income – to levels not seen since the days of Mrs Thatcher.

“Yet the combined effects of ever-growing spending on the NHS and an economy smaller than projected pre-pandemic mean that he is still likely to be short of money to spend on many other public services. On central forecasts, there will be little or no scope to increase spending on things like local government, the justice system and further education, after a decade of sharp cuts.”

The report also indicated that uncertainty for the economy remains “incredibly high”. If the economy does better than expected, the IFS said it may even turn out that the £28bn package of tax rises announced in the March 2021 Budget will prove unnecessary for getting the public finances back to current budget surplus from 2023/24 onwards.

If that happens, the IFS is expecting the Chancellor either to abandon some of his proposed tax increases, or to reduce other taxes. The report also warned that if the economy struggles, those tax rises could need to be almost tripled for a current budget surplus by 2025/26.

Johnson added that the Chancellor is still facing “huge uncertainty” over the direction of the economy, and hence over the state of the public finances.

“(Sunak) will be hoping against hope that stronger-than-expected growth in revenues over the next few years will help to dig him out of what still looks like a fair-sized hole,” he added.

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