Analysis-UK politicians’ election promises can’t stop rising tax burden

By David Milliken

LONDON (Reuters) – Britain’s next government will find it almost impossible to prevent tax levels from hitting a record high, despite an election campaign in which both main parties pledged not to raise tax rates important.

Labor leader Keir Starmer, whose party has a 20-point lead in opinion polls, published a manifesto on Thursday in which he aligns himself with the pledge of Prime Minister Rishi Sunak’s Conservatives not to increase income tax rates, employees’ national insurance contributions, value added tax or corporation tax.

Together, these taxes represent more than 70% of total government revenue.

But economists – including those at the International Monetary Fund, non-partisan think tanks and the big banks – believe whoever forms Britain’s next government will soon break the spirit, if not the letter, of those promises.

“I don’t think any of them have given voters a realistic picture,” said Gemma Tetlow, chief economist at the Institute for Government.

She said the commitments would “limit their room for maneuver and call into question the credibility of their commitments”.

Election promises not to increase taxes have been commonplace since 1997, when Tony Blair promised not to increase income tax or VAT. His party was defeated in 1992 when the Conservatives ran ads focusing on the “labour tax bomb.”

Despite this, tax revenues are now on track to reach their highest level since 1949, at 36.5% of national income this financial year, according to the government’s Office for Budget Responsibility, up sharply from 33.1 % in the 2019 elections.

This represents a higher tax burden than the 30.5% estimated by the IMF for the United States, but much lower than the 46.3% average in the Eurozone, where the tax and benefit system covers the retirement savings that the British build up privately.

The tax burden in Britain has risen much more since 2019 than in the United States or the eurozone, partly because thresholds for paying income tax and other taxes have been frozen while high inflation boosted the size of the economy’s liquidity, putting a larger share of citizens’ income into the budget. net of tax.

This overshadowed the impact of the two National Insurance cuts – from 12% to 8% – which Sunak made much of.

The UK tax burden is also expected to continue to rise. In March, the OBR predicted 37.1% by 2028/29, while the Institute for Fiscal Studies think tank estimated that the Conservative manifesto plans, which include a further insurance cut national, would see the tax burden further increase to 36.7%, the highest since 1949.

Plans in Labor’s manifesto include VAT on private tuition fees, an additional levy on oil and gas companies and a crackdown on tax evasion. These measures would raise 8.55 billion pounds ($11 billion) per year and raise the tax burden to a record level of 37.4%.

“INEVITABLE” TAX INCREASES

However, the actual tax burden could be even higher, as all these forecasts assume that the next government will stick to the March annual budget which limits growth in public service spending over the next few years to 1% on top of inflation.

Last month, the IMF, in its annual review of the UK economy, said these plans “do not appear to sufficiently take into account known pressures in public services” and that annual spending growth of 2% in terms real was more realistic.

Britain’s hospitals are experiencing record waiting times for patients and prisons are already so full that criminals are being released earlier than expected. Prisons are expected to see annual spending reductions of 6%.

Overall, existing budget plans include spending cuts of £10 billion to £20 billion in areas which – unlike health, schools or defense – have not been exempted, roughly the equivalent of the entire annual budget of the Ministry of the Interior.

Sanjay Raja, chief UK economist at Deutsche Bank, said such cuts would be difficult to reconcile with Starmer’s public commitments that “we are not going back to austerity”.

“You will inevitably get tax hikes,” Raja said.

Labor says its program is fully costed and that it does not plan to raise taxes beyond what it has already publicly stated. The Conservatives dispute this claim and say Labor’s plans would result in an extra £500 a year in tax rises for the average working household – an estimate Labor has rejected as deliberately misleading.

The IMF said the next UK government should consider increasing taxes on greenhouse gas emissions and road use, widening the scope of VAT and inheritance tax, or to increase capital gains and property taxes.

Low growth and high interest rates – which have led to a doubling of spending on debt interest since 2019 – are behind much of the budget impasse, and a recovery in one or other of these factors would make life much easier for the next government.

But without this or a tax increase, the IMF predicts that Britain’s £2.5 trillion public debt, which rose during the COVID-19 pandemic, will continue to rise – something Labor and the Conservatives warn are committed to avoiding.

Britain was taught a heavy lesson in 2022 when Prime Minister Liz Truss announced plans to cut taxes without seeking the blessing of the OBR. Investors dumped British government bonds and the Bank of England had to intervene to stabilize the market.

Most British voters are already resigned to higher taxes, whoever wins, polls show.

One option would be for Labor to use a review of public spending needs over the summer as a basis for changing its position on taxation before the autumn budget, Raja said.

But IFS director Paul Johnson said future UK finance ministers should already prepare the public for bad news. The OBR’s growth forecast for March was higher than most economists now thought likely and borrowing costs rose.

“If the new government comes in and says, ‘Oh look, this is a terrible shock… and that’s why we haven’t told you about all these tax increases’… it would basically be dishonest.”

($1 = 0.7830 pounds)

(Reporting by David Milliken)