The UK tax burden is set to hit a post-war high in 2027/28. ICAEW examines how governments can improve the public purse at the same time as keeping public sentiment onside.
Prior to the 2008 global financial crisis, British governments were able to expand the welfare state while maintaining the tax take at less than 35% of the overall economy. Since then, however, economic growth has slowed dramatically, with productivity not responding to a series of industrial and levelling up strategies. And the defence budget, once close to 10% of GDP, has fallen to 2% of GDP – the NATO minimum – and cannot be ‘raided’ further to offset spending increases elsewhere.
The UK’s public sector net debt has increased from £0.5trn (35% of GDP) in March 2007 to £2.5trn (100% of GDP) in March 2023. Rising debt levels were supercharged by the pandemic and cost-of-living crisis, which saw the government provide unprecedented levels of financial support to households. The furlough scheme, Energy Bills Discount Scheme, Energy Price Guarantee and other measures such as Council Tax rebates all came at a cost, with public sector spending relative to GDP spiking at 51.35% in 2020/21.
Now, with the worst economic turbulence assumed to have passed, efforts are underway to mend the nation’s purse. While there is much debate over whether tax cuts or increases would be more effective to drive the UK’s economic recovery, the current direction of travel for tax is undeniably upwards. In fact, the Office of Budget Responsibility (OBR) forecasts the tax burden will reach a post-war high of 37.7% in 2027/28, despite what many commentators believe are optimistic assumptions around the government’s ability to cut public spending over that period.
Tracking public sentiment
The upwards trend of the UK tax burden – and the ongoing debate over whether it should be happening at all – is set to reshape public opinion around how the government raises and spends its funds. The National Centre for Social Research (NatCen) has tracked public sentiment towards tax since 1983. Every year, its British Social Attitudes Survey has asked the public whether they wish to see taxes and spending fall, stay at the same level, or increase.
As illustrated below, the proportion of respondents who believe taxes and spending should fall has consistently been under 10% since the survey began. However, the proportion of those that believe taxes and spending should increase or stay the same has varied significantly over the years. NatCen points to how Conservative policies to cut taxes and spending in the 1990s saw public opinion move in the opposite direction, only for the reverse to take place during the Labour governments of 1997-2010. As the age of austerity began, increasing taxes and spending once again became popular.
This pattern of behaviour was described by academic Christopher Wlezien in 1995 as a ‘thermostatic reaction’, whereby voters respond to changes in public spending when it moves above or below a level with which they are comfortable. While this has been evident in the UK historically, early evidence suggests that the public has not yet responded ‘thermostatically’ to increased government spending during and since the pandemic. In the 2021 survey, the proportion of those who believed that taxes and spending should increase remained at a high 52%.
Much has changed since NatCen conducted its 2021 survey. Tracker data from YouGov provides more timely insight on the subject. The pollster asks respondents “Are we taxing and spending the right amount?” and offers three answers that correspond to the British Social Attitudes Survey. Notably, the tracker shows a marked decline in the proportion of people who find the level of taxation and spending ‘about right’, falling from 22% in November 2021 to 12% in May 2023. Furthermore, the leading sentiment in May 2023 was that tax and spending are too high, suggesting that Wlezien’s thermostatic reaction may finally be coming into play.
Different types of taxation
Additional data from YouGov shows that public sentiment towards different types of taxation varies considerably. Illustrated below, public support is greatest for income tax and National Insurance. In April 2023, 36% of those surveyed considered both of these taxes to be fair or very fair. However, this level of support is waning – as it is across all major forms of taxation – while the proportion of those who consider them unfair is correspondingly increasing. In July 2020, just 19% believed income tax to be unfair or very unfair but, by April 2023, this had increased to 32%.
Inheritance tax (IHT) has consistently held the title for the UK’s most unpopular tax. In April 2023, 50% of respondents considered IHT to be unfair or very unfair. And with IHT thresholds frozen until at least April 2028, more and more families are expected to be impacted by the tax.
Following IHT is council tax, which has experienced a notable increase in the proportion of those that consider it to be unfair. In April 2023, 47% considered it to be unfair or very unfair, up from 37% in July 2019. Given that council tax is rooted in property valuations that took place in 1991, disapproval over its perceived fairness may be expected to increase as time goes on.
Demographics are a key driver of the results. For example, YouGov finds that the perception of the fairness of income tax generally rises with age: 41% of over-65s consider income tax to be fair or very fair compared to 24% of 18-24-year-olds. However, respondents in this youngest age bracket are also the most likely to report being unsure (26%), indicating a lack of knowledge in the subject.
Low tax literacy in the UK is an important caveat when assessing measures of public sentiment. Research conducted by Deloitte in 2019 found a significant tax education gap and drew a link between tax literacy and overall perceptions of fairness. Those individuals who had the greatest understanding of tax were also more likely to consider it to be fair.
If there is one area of taxation where public sentiment has been consistent in recent years, it is that the wealthiest should contribute more to the public purse. Illustrated below, YouGov data for May 2023 shows that 63% believe taxes on the richest in society are too low, with this sentiment moving steadily upwards since polling began in 2019.
It is no surprise, therefore, that public support for a wealth tax is generally very strong. Research conducted on behalf of the Wealth Tax Commission presented respondents with a number of options for increasing taxes, including income tax, VAT, council tax on properties worth more than £1m, capital gains tax, and the introduction of a wealth tax. As shown below, the latter option received the most support, with 41% choosing it as their first preference, and a total of 75% expressing some preference towards the proposal.
It’s easier said than done, particularly as a wealth tax would need to be designed from scratch, but YouGov has polled the public on a variety of options. Illustrated below, the data shows greatest support for a tax of 1% on wealth above £10m and a tax of 2% on wealth above £5m, with more than 70% of the public supporting both proposals. Introducing a one-off tax on wealth above £500,000 spread over five years had less support (53% of respondents). Less than half backed proposals that included raising capital gains tax and replacing non-domicile tax status with a time-limited alternative.
It’s clear that the national bargain is an evolving agreement that responds to economic pressures and prevailing social attitudes. What is less clear, however, is how the UK navigates its present challenges while keeping the national bargain broadly intact. Pressures on public spending imply the tax burden will need to rise further at a time when the public increasingly feel that taxes are unfair and that the overall level of taxation and public spending is generally too high.
The challenge for policy makers is that while the research suggests the public appear to be receptive to introducing some form of wealth tax and making other taxes more progressive, the political and practical obstacles to making changes to the tax system are not easy to overcome, irrespective of whichever party takes up the mantle. With a general election due to take place by the end of 2024, the UK’s national bargain is set to undergo yet another significant reshaping.