News
Jessica Fino 7 Feb 2017 04:06pm

UK tax burden set to rise to highest level in 30 years

The UK tax burden will rise to its highest level since 1986 over the next decade, according to the Institute of Fiscal Studies (IFS)

According to IFS Green Budget, published today in collaboration with ICAEW and Oxford Economics, the UK faces 15 years of austerity if the government continues to aim for the elimination of budget deficit by the next parliament.

The chancellor’s target to eliminate the deficit could force the government to find an extra £34bn, extending the period of spending cuts and tax rises well in to the 2020s, the IFS said.

It also warned that the deficit this year will be higher than in all but 13 of the 60 years before 2008, remaining the fourth highest of the 28 advanced economies.

Moreover, spending on public services has fallen by 10% since 2009/10, making it the longest and biggest fall in public spending on record.

The cuts are due to continue and taxes will carry on rising, with real departmental spending due to be 13% lower by 2019/20 than it was a decade ago.

Public spending on health, pensions and overseas aid will increase at the expense of education, defence and public order and safety, where spending will be significantly cut.

Andrew Goodwin, lead economist at Oxford Economics, said that while 2016 was an easy year to forecast, 2017 will be much more challenging.

Household spending power will be squeezed this year, with inflation rising to 3%. The inflation rate in the past few years has been of 1%, he pointed out.

Growth in 2017 was almost entirely down to consumer spending, which Goodwin said is worrying as there will be a substantial squeeze on wages

The IFS also found that business investment declined by 1.5% in 2016, to levels previously seen during the European crisis.

Goodwin said that growth will become slower but more balanced, with the main contributors to GDP being consumer spending, investment and government spending, respectively.

The Green Budget has remained more optimistic than consensus, but Goodwin argued that he expects consensus to increase their forecasts in the coming months.

In the medium-term, growth will remain subdued, but Brexit will not be “such of an issue” as the negative impact of it will only play after 2021.

Goodwin did criticise the government’s current approach to Brexit. "We think the government’s chosen path for Brexit is in fact one of the most economically damaging,” he said.

On the assumption that there will be a three-year transitional arrangement after Brexit, followed by a free-trade agreement, and that the government will take a ‘populist’ approach in areas such as immigration policy, Oxford Economics still estimates that the UK economy could end up around 3% smaller in 2030 than it would have been if we had voted to remain in the EU.

Goodwin added, “Should we fail to secure a free-trade agreement, then the outcome is likely to be worse still.”

Paul Johnson, director of he IFS, said that the Green Budget aims to give an independent look at public finances. The IFS has been doing it for the past 36 years because the chancellor continues to prepare the budget “in secrecy”.

Speaking at the launch of the publication in London this morning, Johnson said that he did not think the government will get to a balanced budget by 2024.

“Would I put a lot of money on achieving budget balance by 2024? No. Is that a huge problem? No.”

Hillary Lindsay, president at ICAEW, said during the same event that IFS’s independent commentary was “much needed at a time of great uncertainty”.

Lindsay also noted that the last public sector debt management strategy was published in 1995.