Whitehall spending spree makes higher taxes inevitable, warns IFS

Jeremy Hunt, UK chancellor of the exchequer

Rising taxes are inevitable if the Government keeps spending heavily, the Institute for Fiscal Studies (IFS) has warned.

Taxes are already on course to hit their highest share of GDP since 1948, according to official forecasts, although the IFS has warned recent policies could drive up levies further.

The prospect of a greater tax burden on households comes after a surge in Britain’s borrowing bill since Covid.

Martin Miklos, an economist at the IFS, said: “The increase in taxes, while historically and internationally large, has not matched the growth in spending.

“Hence, it has not been able to prevent debt from rising by more than in any other comparator country bar Japan.

“Countries can and do make very different choices about the size of their state – but choosing a higher level of spending without a commensurately higher level of taxation is not costless and is unlikely to be sustainable in the long term.”

The Government has recently cut some taxes, including the headline rate of National Insurance.

However, it has also embarked on a programme of stealth taxation by freezing thresholds, while it has already increased the corporation tax rate from 19pc to 25pc.

Decades of heavy spending have led to a significant increase in the size of the state since the turn of the century.

In 2001, government spending in Britain amounted to just under 35pc of GDP, around eight percentage points lower than the average across advanced economies.

That gap narrowed under various Labour and Conservative governments, peaking during the pandemic as it hit around half of GDP.

Following a recent fall, that figure is now expected to settle at around 43pc of GDP, which represents a permanent increase in the size of the state.

The IFS added: “Pressures on spending on areas such as health and social care are unlikely to abate any time soon.”

Rising spending requirements have coincided with a jump in Britain’s national debt bill, which has risen from a third of GDP in 2000 to more than 90pc today.

Forecasts from the International Monetary Fund show how Britain’s debt will account for almost 100pc of GDP by the end of the decade.

This comes at a time of higher interest rates and weak economic growth.

The IFS said: “The UK is now forecast to have the seventh-smallest cumulative growth among the 37 comparator countries in the period 2019–29.

“With low growth (and the era of very low interest rates seemingly having come to an end), much tighter fiscal policy is needed to get debt falling.”

A Treasury spokesman said: “Thanks to our responsible action with the public finances and our progress on the economy – with inflation falling and wages rising – we have been able to cut National Insurance by a third while sticking to our fiscal rules, with debt falling in the final year of the forecast with a larger buffer than last spring.

“The Chancellor has been clear that growing the economy and improving productivity is vital to improving public services, and that any further tax cuts will be delivered in a fiscally responsible way.”

Play The Telegraph’s brilliant range of Puzzles – and feel brighter every day. Train your brain and boost your mood with PlusWord, the Mini Crossword, the fearsome Killer Sudoku and even the classic Cryptic Crossword.