Britain’s tax burden has risen to 37% of GDP, and is forecast to reach a post-war high of 38.5% by 2030/31, while the structure of the tax system has grown steadily less growth-friendly over the same period, according to a new briefing from the Institute of Economic Affairs. Fiscal drag means the share of adults paying higher rates of income tax has risen from 3.5% in 1990 to a projected 14% by 2027, while Britain now raises more in property taxes as a share of GDP than any other country in the OECD.
The briefing, by Tom Clougherty, independent policy analyst, argues that the level of tax did not cause Britain’s post-2008 slowdown, but has made recovery from it much harder, and that the tax system’s flaws will bite even harder as the burden keeps rising. It forms part of the IEA’s forthcoming book, The Great Stagnation: Why Britain Stopped Growing.
Clougherty finds:
Over the past quarter-century, as the tax burden has risen, the structure of the tax system has become markedly worse. The level and structure of tax did not create the UK’s post-2008 growth slowdown, but they have made recovery much harder.
Although headline income tax rates have not risen dramatically, fiscal drag means far more people pay higher rates. In 1990, just 3.5% of adults paid higher rates of income tax; by 2010 this had increased to 8.5%, and it is projected to rise to 14% by 2027. Hundreds of thousands of people have also been drawn into the “60p tax trap” created by the withdrawal of the personal allowance from those earning over £100,000.
While income tax on above-average earners has increased, the share of revenue from consumption taxes such as VAT and excise duties has fallen from 28% to 22.5% between 2000 and 2024, the opposite of what economic evidence suggests is best for growth.
After both the 2008 financial crisis and Covid, governments responded by sharply raising taxes on investment, with predictable results for business investment and productivity growth.
Britain raises more in property taxes as a share of GDP than any other country in the OECD, and stamp duty in particular inhibits both housebuilding and labour mobility.
Britain’s tax burden is expected to rise to a post-war high by the end of the decade, meaning the flaws in the tax system’s structure will likely become a more binding constraint on growth than they have been over the last two decades.