Rishi Sunak pledged a moral mission to cut taxes and set limits to the government’s role as he set out plans to underpin a new post-Covid economy on Wednesday. Yet the Conservative chancellor, despite his hawkish instincts, is set to oversee an unprecedented expansion in the size of the state.
The yearly real-terms increase of 3.3 per cent in day-to-day spending on public services will, together with changes to in-work benefits, take total government spending from 39.8 per cent of gross domestic product before the pandemic to 41.6 per cent by 2026-27.
This means public spending will be at its highest sustained level since the 1970s — before the privatisations of the Thatcher era when large parts of the economy were still nationalised.
The rise in spending has been more than matched by higher taxation. The increase in corporation tax and freezing of income tax thresholds announced in March, together with the new health and social care levy, will drive the tax burden up from 33.5 per cent of GDP before the pandemic to 36.2 of GDP by 2026-27 — the highest level since the postwar period.
Richard Hughes, chair of the Office for Budget Responsibility, the independent fiscal watchdog, said this meant the chancellor had “announced more tax rises this year than in any single year since Norman Lamont and Ken Clarke’s two 1993 Budgets in the aftermath of Black Wednesday” — with the overall tax burden reaching its highest level since the Labour government of Clement Attlee, which crafted the UK’s welfare state.
“The big picture is that the pandemic has made our economy smaller than we expected it to be. But the government is spending more because they have favoured a higher tax form of Conservatism than many — including many Tory MPs — expected,” said Torsten Bell, director of the Resolution Foundation, a think-tank.
With Sunak boasting of returning health capital budgets and schools funding to 2010 levels, and declaring the Conservatives to be “the real party of public services”, the speech marked a conscious break with the austerity policies pursued by his immediate predecessors.
“This government wants to undo the failed experiment of shrinking the state,” said Ian Mulheirn, executive director for UK policy at the Tony Blair Institute. “Sunak has concluded that running the public services on a shoestring is incompatible with winning elections.”
Yet while spending is set to return to 1970s levels, the shape of the state will be very different from half a century ago. The biggest change is the share of spending going to health and social care — set to rise to 8.4 per cent of GDP by 2024-25, more than double its share in 1978-79.
This means that despite Sunak’s relative largesse, funding for public services will not feel lavish. The Institute for Fiscal Studies, a think-tank, said increases to departmental budgets for day-to-day spending were “broadly comparable” to those awarded by Labour governments in the early years of the millennium, but the key difference was “the extent to which these increases are swallowed up by the NHS” — so that “things might still feel tight in other areas”, in particular in local government.
In addition, much of the increase in public spending stems from the sharp rise in capital investment, announced at the outset of the pandemic and now being allocated to infrastructure projects around the country — which will pay off, but only in the longer term.
Meanwhile, households will feel higher taxes bite from April — with increases kicking in at the end of a difficult winter where higher energy costs and rising inflation will eat into their disposable incomes.
This tax-and-spend approach puts Sunak at odds with much of his party — and the chancellor acknowledged his own unease with the rising tax burden, even while attributing it to “the unprecedented crisis we faced and the extraordinary action we took”.
“Now, we have a choice . . . to recognise that the government has limits,” he went on. Tax rises had been necessary to fund the NHS and get public debt under control, he argued, but “as we look towards the future . . . my goal is to reduce taxes”.
Yet while Sunak may have enough fiscal headroom to cut taxes in the run-up to the next election, there will still be long-term pressures that will make it very difficult for any chancellor to reverse the expansion of the state.
Paul Johnson, director of the IFS, said the chancellor had been wrong to claim tax and spending were settling at higher levels because of Covid, since measures to boost capital investment and address demographic pressures on health and social care were “largely . . . unrelated to the crisis”.
The OBR has already warned that the rising costs of pensions, health and social care could put pressures on the public finances equivalent to some 5.5 per cent of GDP by 2050, while the climate-related transition to net zero could cause an additional hit, since it threatens tax revenues from motorists.
Hughes, the OBR chair, said anyone who thought the government would in reality cut taxes before they reached the highs Sunak’s current plans imply would need to answer two questions.
“Which responsibilities that the state has now taken would it then retreat from to accommodate these tax cuts? And if the answer is none, then would we be content to see our debt continue to rise in normal times, given what we now know about how much the next crisis might cost us?”
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