The UK is now a high-tax state – we’d better get used to it

Editorial: These are the new economic facts of life. They will have to be faced, no matter which party is in power

What the additional analysis from the IFS reveals is just how significant the autumn statement is (Reuters)

As ever, independent economic research body the Institute for Fiscal Studies (IFS) has told us the kind of truths about this week’s “fiscal event” that chancellors usually don’t get round to in their speeches – the kind that get buried in the official documents, if they are mentioned at all.

We did already know, to be fair to Jeremy Hunt, that British families face what IFS director Paul Johnson describes as a “long, hard, unpleasant journey”. We were also aware that middle Britain is facing quite a shock in the coming months – surely an unpromising start to the Conservatives’ attempt to win a fifth term in office. Some things cannot be disguised, after all.

What the additional analysis from the IFS reveals is just how significant the autumn statement is. For it crystallises, as never before, the fiscal impact of the momentous events of recent years: Brexit, the pandemic, and the war in Ukraine. It shows that the size, and shape, of the British state is now very different from how we were used to it being before, say, the EU referendum of 2016 – and that this state of affairs will persist for decades to come.

Put at its simplest, the UK is now a high-tax state, at least by its own historical standards, with a large public sector as a proportion of the whole economy. It also has endemically low economic growth rates, along with a huge burden of national debt and debt interest.

No amount of boosterish rhetoric can – or should – disguise these facts. The sheer scale of the national debt – incurred principally from the global financial crisis of 2008-09, the Covid pandemic and the energy crisis, coupled with a global trend towards higher interest rates – means that it cannot be paid down quickly, even with radical change.

These are the new economic facts of life. They will have to be faced, no matter which party is in power. The British national debt has been incurred, subject to brief respites and sometimes erosion by inflation, since the 17th century. It has ballooned during world wars, depressions, pandemics – and financial and energy crises.

In real terms, in relation to the national income, it is at its highest since about the mid-1950s – and, partly as a consequence, taxes as a proportion of GDP are the highest they have been in peace time. The debt stands at around five times the proportion of GDP it represented at its lowest post-war point, in 1991.

Fully £37 of every £100 produced by the UK economy is taken in taxes of one sort or another. Depending on the possible trends in growth, spending and interest rates, debt interest payments will be around £100bn a year for the next few years, and will remain high for decades to come. Britain has once again mortgaged itself to the hilt.

As for any ambitious housebuyer, that might not matter so much if there were any prospect of a healthy increase in income coming through to keep the repayments affordable.

Sadly, the IFS confirms that this may not be the case. Growth may pick up towards the end of the decade, but the crucial point is that it will be lower than would have been the case if Britain had been better governed, and made better choices, in recent times.

The autumn statement contains relatively few new measures to promote long-term growth, though projects such as Sizewell C and HS2 have survived. But the problem can also be attributed to a series of “own goals”, identified by the IFS, that have been scored since the Conservatives came into government in 2010.

These include the cuts to education spending in the 2010s (especially in skills and vocational training); slashing public infrastructure investment, something already under way at the tail-end of the Labour government; political instability; the disastrous Truss-Kwarteng mini-Budget; and, most enduringly, Brexit, which continues to wreak damage on Britain’s exports and prosperity.

For a Conservative chancellor such as Mr Hunt, having to preside over the creation of a big-state, high-tax, high-debt economy cannot be easy. It is especially uncomfortable given that his party is still addicted to cakeism, and to the fantasies that gave us the doomed Truss premiership.

Even Mr Hunt has become prey to this; many of his projected painful cuts to spending have been postponed until after the next election, kicking the can down the road.

So it is not a particularly Tory sort of Budget. Indeed, the IFS afforded the chancellor the backhanded compliment that his autumn statement is quite markedly progressive, with its inflation-proofing of benefits and pensions, help with energy bills, and higher taxes on salaries, dividends and capital gains for the rich.

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None of these things are attractive to his own side, and he will have some difficult arguments with his MPs and activists in the months ahead as he attempts to justify his plans. They want tax cuts.

It must be even more painful for a sensible Remainer such as Mr Hunt to have to talk with conviction about Brexit “opportunities”, which have thus far proved highly elusive and may never materialise. Perhaps he will, as he claims, “fire up our country to be the world’s next Silicon Valley, a hub of innovation based on our world-class universities, our creativity and our inventiveness”.

Britain is certainly not a basket case, and has many competitive advantages. But the hard economic fact remains that prosperity and high wages derive from boosting productivity, which requires healthy, sustained levels of investment from both the private sector and the public sector. Of that, there is depressingly little sign.