As The State Gets Bigger, Taxes Will Rise - It's Time To Be Honest About That

1st May 2023

Winston Churchill, a man of famously expensive habits, believed that income should always be adjusted to meet expenses, and never the other way around.

In the words of his biographer, Roy Jenkins, "he decided that when the gap between income and expenditure became uncomfortably wide, the spirited solution must always be to increase income rather than to reduce expenditure."

Government finances are, of course, not equivalent to those of a household. A considerably larger fraction of Churchill's budget went on champagne, for a start, and the British state is rather more frugal and rather less inclined towards luxury. But there are nonetheless certain parallels to be drawn. For one, it is common for fiscal policymakers to find that the desired level of public expenditure exceeds projected income from tax revenues. The UK government has run an overall budget deficit - with spending in excess of revenues - in all but three of the past 40 years.

That's nothing new. More significant is the fact that when those gaps become uncomfortably wide, governments are increasingly taking the Churchillian route and increasing taxes rather than cutting back expenditures. In the UK, tax revenues amounted to 36.8 per cent of national income in 2022-23, versus 32.8 per cent a decade earlier, and they are on track to rise to 37.7 per cent of national income by 2026-27. There seems to be a striking degree of consensus between the main political parties on this move towards a bigger state, and the tax burden is similarly on the rise across many developed countries.

Why? In short, because the upwards pressures on public spending are proving too great to contain.

An ageing population is a key part of the story. The large cohort of baby boomers born just after the Second World War are now receiving state pensions and placing greater demands on health and social care budgets. The Office for National Statistics projects that the number of people aged 85 and over in the UK will increase by 40 per cent over the next 10 years alone.

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