A reader, friend and former colleague asks an interesting and very pertinent question; when taxes are at a post war high, how come the government is running out of money and nothing works?
The answer is quite simple really, it is a combination of higher debt to cover one off emergencies, low growth and an ageing population. The IFS is the place to go to learn more but in short.
Debt interest spending is likely to settle at a high sustained level not seen since the 1980’s, or £30 billion a year more than the UK is used to. £30 billion that cannot be spent elsewhere. But we managed perfectly well in the 1980 with these debt levels, the real problem is that the UK needs to keep borrowing more. Therefore the best way of bringing down the debt mountain is not to pay it off, but to let higher growth whittle away at the debt. Over time with high growth debt falls as a percentage of GDP and we can stop worrying about it.
It would really help if the far right didn’t keep insisting we need to pay off debt immediately, we never have and don’t need to, but we do need growth.
The real trouble is we have terrible growth, the long term trend since the banking crisis has been weak and we have had covid since then. That means, as the IFS puts it, UK GDP is still 5.2% short of its “2012 to 2019 trend: a worse relative performance than either the United States or the Euro Area where the shortfalls range between 2% and 3%.”
So we seem to have lost 3% of growth from covid and we know we are losing 4-6% (some say more) from Brexit. That means the UK economy should be 6%-9% bigger than it is. If it was, debt would be a much smaller problem and taxation would bring in far more. Remember real wages are still the same level as 14 years ago. That is a lot of lost income tax, let alone VAT, fuel duty and stamp duty and all the rest. Fuel duty, by the way, should be much higher but the government is too scared to increase it and is therefore losing 10’s of billions a year in lost income.
One reason growth has been so low for so long is austerity, the government is desperately trying to cut spending to make room for tax cuts, in a vicious circle where it cuts things essential to growth in order to try to make up for low growth. It does not help that the idiots in charge really believe that cutting spending and taxes boosts growth, until that changes we are stuck in a doom spiral.
Then we desperately need to increase spending on health and social care, by 2% by 20230. As the population ages, the money and resources needed by the health service soar, just as millions of people stop working to earn money, stop paying NI and pay much less income tax, as pensions are lower than wages. 2% of GDP extra for health is the same as the defence budget, just to keep the health services running at anything like an acceptable level.
Oh and in past years governments have paid for lower taxes by shredding the defence budget. That post Cold War bonanza is over, in fact we need considerably more for defence, not less.
But the longer term issue that no one mentions, is that we have been trying to run a European style state with American style taxation. North Sea oil and privatisation were one offs that were used to pay for permanent tax cuts that were unsustainable in the long term.
This current crisis is not a short term one, it took decades to get here, and now we need more spending on a dozen things including encouraging growth. There is no sign of that happening and not much money either.
We have spent the money raised from selling the family silver (thanks for the warning H. Macmillan), and from North Sea oil and we have nothing to show for it. We have had low tax for so long we think it is natural, it isn’t and we have had disastrous growth under an ideologically driven government that can never admit that it was wrong.
As a result we have high tax that has to go higher, low growth that the government has no plan to boost and higher debt.
Oh, and with an ageing population the tax burden falls increasingly on the smaller, young, working age population, who have been screwed already by student debt and soaring house prices.
I hope that answers the question.
Economics, trade and Brexit, not necessarily in that order but the dog always comes first.
By Jonty Bloom Media
A brilliant answer, thank you! What would also be great would be a long piece on what needs to happen to turn this Titanic round before it hits the iceberg and sinks ( I’m assuming a more progressive approach to income tax and rejoining the single market for starters … )