The Institute for Fiscal Studies (IFS) has warned that Chancellor Rishi Sunak’s recent fiscal measures targeting workers and businesses are projected to result in an additional £100 billion in taxes by the end of the decade. This heightened tax burden coincides with a surge in net migration, exacerbating strains on public services.
Escalating Tax Burden and Fiscal Challenges Ahead: Insights from the IFS
The esteemed think tank highlighted that Britain’s tax burden is projected to increase by 2030 due to frozen tax thresholds, exacerbating the strain on taxpayers. Inflationary pressures will propel more individuals into higher tax brackets, while the imposition of corporation tax will additionally burden businesses.
This exacerbates the anticipated rise in the tax burden, despite the tax cuts announced in the Autumn Statement. Chancellor Jeremy Hunt is reportedly considering reducing national insurance and vape tax in next week’s Budget, opting to prioritize these cuts over income tax adjustments. This shift comes amid revelations of a smaller budget allocation than initially anticipated.
According to the IFS, Britain is projected to incur an additional £66bn in expenses this year compared to a scenario where public finances had followed their pre-Covid trajectory. Furthermore, by 2028, the surge in tax revenues is anticipated to amount to £104bn in present-day value.
The think tank attributed this escalating burden to a deliberate choice by the prime minister to expand the size of the state.
The IFS has cautioned that the Chancellor’s decision to uphold Mr. Sunak’s tax policies will escalate the tax burden from 33% of GDP before the pandemic to a record high of 37.7% by the end of the decade.
Under Mr. Hunt’s tenure, income tax thresholds have been frozen for six consecutive years, coupled with a notable increase in corporation tax from 19% to 25% last year.
Additionally, the think tank highlighted concerns about the surging net migration, which is anticipated to result in minimal growth in public service expenditure per capita for the remainder of the decade. This scenario is projected to create a significant £25bn shortfall in public spending.
As per projections by the Office for National Statistics, the population is expected to surge from 67 million in 2021 to 73.7 million by 2036, with approximately 6.1 million of this increase attributed to net migration.
While faster population growth could theoretically bolster revenues through increased taxes, the IFS cautioned that under current plans, public sector spending per capita is slated to rise by a mere 0.2% annually after the upcoming election.
The think tank highlighted: “New long-term population projections driven mostly by higher expected net migration help increase the size of the economy but will make existing spending plans even more challenging in per-capita terms.”
Challenges and Considerations in Government Spending
The Government’s tax, the Office for Budget Responsibility and spending watchdog, anticipate the Government to rise spending on public services by 0.9% on average over the coming parliament. According to the IFS, this translated into spending growth of 0.5% a year per-person.
However, it later added: “If we take the latest ONS population projections, the average annual growth in real-terms spending per capita falls to just 0.2pc a year.”
The IFS cautioned a £25 billion cash injection would be necessary to prevent per-capita spending from being cut.
With a reduced amount of cash to spare in the budget, this calls for deeper cuts to spending in Whitehall department outside of defence, NHS and schools, which are safeguarded, if the Chancellor wants to maintain investment levels.
Carl Emmerson, deputy director of the IFS, highlighted that higher net migration was not automatically a good thing for the public finances.
Mr Emmerson referred to the prime minister’s tax and spending legacy as “quite clearly one where there’s been an increase in the size of the state”.
The IFS analysis follows a warning from David Miles, an executive member of the Office for Budget Responsibility (OBR), who expressed scepticism about the idea that influxes of new migrants could resolve Britain’s fiscal challenges.
Professor Miles, associated with Imperial College, cautioned last month that the notion of “persistently high levels of net immigration boosting the labour force” might not lead to sustained improvements in fiscal matters.
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