Fifty years of putting off the inevitable

In a few weeks, when he delivers the budget, Jeremy Hunt will announce a tax cut. This will not be remotely affordable. It will only fit within the government’s fiscal rules because he is pretending that spending will rise by far less than it actually will after the election. This is not a contentious assertion. The head of the OBR says the figures are not even fiction because “someone has bothered to write a work of fiction”.

Some reports suggest Hunt may pretend that spending will be even lower than the current figures if necessary in order to make the sums work. When we have 153 NHS trusts running deficit budgets and dozens of councils pleading for extra financial support to avoid catastrophic cuts, this would be a profound insult to voters’ intelligence.

When he announces this tax cut he will tell us that the tax burden is unsustainable and harming growth. Press coverage will mostly support that assertion, after all the tax burden has gone up in recent years. But it is still lower than most other similar countries. It didn’t used to be. Back in the 1970s we taxed more than the “EU 14” (countries that made up the EU before 2004) and more than the OECD average. Since then ours has dropped, and only in the last year or so gone back to where it was then. Whereas in Europe is has been steadily rising.

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Which raises the question of how we’ve managed to keep tax relatively low, especially as there are some big items where our spending is higher than the EU average, such as defence and education. One important area of difference is “social spending” – defined as cash benefits plus healthcare, social care, and childcare. The UK spent 22.1% of GDP on these things in 2022 compared to 31.6% in France and 26.7% in Germany. It’s higher in most of the EU14 countries.¹

Break this down further and our “savings” come on working age benefits, which are far lower, particularly for unemployment, and pensions, which, despite the triple lock, are still significantly less generous than most EU14 countries. This a function of having a benefits system that has a far weaker contributory aspect. Europe’s higher taxes are mostly in the form of higher social security contributions.

But on some benefits we spend more. Vastly so on housing benefit where we are comfortably the biggest spenders, and also on child related benefits. Our health spending has also jumped up quite a bit since the pandemic and is now above the EU and OECD averages, though still some way below France and Germany.

So while “social spending” explains a good chunk of the difference it doesn’t explain all of it. After all our level is above the OECD average (21.1%) but our tax burden is below average. The other part of the story is about investment and here the story is of fifty years of accountancy tricks and decaying infrastructure, designed to avoid accepting the inevitable need for higher taxes.