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UK tax base: weak and getting weaker

The Office for Budget Responsibility’s recent fiscal sustainability report makes sobering reading for anyone concerned with the financing of high-quality universal public services in an ageing society.

On the spending side, the demographic pressures on health and social care funding are well known. But there is less debate about the resilience of the UK’s tax base.

The over-reliance of the UK on revenues from financial services, the housing market and wealthy individuals was brutally exposed in the financial crisis, as the chart below from the OBR report shows:

Chart: Financial and housing sector receipts (OBR)
(OBR 2011: 90)

The loss of tax revenue from key sectors, such as finance and housing, was the primary reason why the UK’s deficit ballooned, rather than the relatively modest stimulus package the Labour government put into play to counteract the drop in output or the level of government spending prior to the crash.

Revenues from finance and housing will not recover their pre-crash levels, as the OBR makes clear. At the same time, other revenue streams will also decline, as the OBR sets out:

“The analysis in this chapter suggests that non-demographic factors could lower the tax to GDP ratio for these specific tax streams by up to 2 percentage points over the next 20 years, equivalent to £29 billion or £1,130 per household in today’s money:

- fuel duties are projected to fall from 1.8 per cent of GDP in 2010-11 to around 1 per cent of GDP in 2029-30;
- VED receipts are projected to drop from 0.4 per cent of GDP in 2010-11 to around 0.1 per cent of GDP in 2029-30;
- UK oil and gas revenues are projected to decline from a peak of 0.9 per cent of GDP in 2011-12 to between 0.1 per cent and 0.2 per cent of GDP by 2029-30;
- tobacco duties are projected to fall from 0.6 per cent of GDP to just over 0.3 per cent of GDP in 2029-30; and
- receipts from the climate change levy, the carbon price floor and EU ETS auction receipts are expected to rise from under 0.1 per cent of GDP in 2010-11 to over 0.3 per cent of GDP by 2029-30.”
(OBR 2011: 107)

In sum, the UK’s tax base is weak and getting weaker, relative to the services it needs to fund. Therefore the long-term sustainability of our public services depends not only on making big strategic choices about which services are most important and finding new ways of making collective provision more efficient and productive, but also on how best we can shore up fair, broadly based tax revenues. This is a major intellectual task for the centre-left, and one on which it has barely got started.

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2 Responses to UK tax base: weak and getting weaker

  1. Mark Braund says:

    Certainly a major intellectual task for the centre-left, but slightly unfair to suggest it’s one on which it has barely got started.

    Many on the left (and some on the right) have been talking about shifting taxes off income and consumption and onto land and natural resources, via a tax on land values, for some time. Compass have published on it, so has the IPPR:

    http://www.ippr.org/publications/55/1380/time-for-land-value-tax

    Andy Burnham came out in support during last year’s Labour leadership campaign:

    http://www.guardian.co.uk/commentisfree/2010/sep/25/land-value-taxation-lvt

    and mainstream economic commentators like Philippe Legrain, Martin Wolf and Sam Brittan are supporters.

    Under current economic arrangements, the gap between what can be raised through tax revenues and what has to be spent supporting those who are denied access to viable economic opportunities, can only widen. LVT offers an alternative, although I admit it’s difficult to see it being implemented without fundamental changes across the economy.

  2. ahmed desai says:

    How about reversing Osbrne’s corporation tax cut from 28% to 23%?

    That would yield over 1% of GDP per annum in taxation, pretty much the whole gap identifed by the OBR.