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COMMENT
* Election 2024
SPENDING AS MUCH AS OTHER COUNTRIES BUT TAXING LESS IS UNLIKELY TO BE
SUSTAINABLE
* Carl Emmerson
* Martin Mikloš
* Isabel Stockton
Published on 17 April 2024
How do the UK’s levels of tax and spend compare with other advanced economies?
* Government finances and spending
* Government spending
* Public finance
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*
*
*
CONTENTS
* How have government spending and revenues evolved in the UK, compared with
other countries?
* How does the UK’s borrowing and debt compare with other countries?
* Weak growth makes fiscal choices harder
Yesterday, the International Monetary Fund (IMF) released its new medium-term
forecast for the world economy and the outlook for the public finances of
individual countries. We compare the situation in the UK with 36 other
comparator countries1 and look at how things have changed since the turn of the
century and what the outlook looks like going forward.
HOW HAVE GOVERNMENT SPENDING AND REVENUES EVOLVED IN THE UK, COMPARED WITH OTHER
COUNTRIES?
As shown in Figure 1 and Figure 2 respectively, the UK’s total government
spending and revenues are now closer to the average of the rest of the G7 as
well as to the average of a broader set of 36 comparator countries than they
were in 2001. Going forward, the UK is forecast to close the gap with the G7
average even further. This would leave government spending and revenues at
historically high levels for the UK, but still a bit below the G7 average. And
while we already spend the same as the average of a broader set of international
peers, we will not tax the same even by 2029.
SIZE OF THE STATE
* Government spending in the UK was 8% of national income below the G7 average
in 2001.
* It then increased comparatively faster in the 2000s under New Labour
governments, reducing the gap to 3% in 2007 on the eve of the financial
crisis. The financial crisis was associated with a particularly big increase
in public spending in the UK, further reducing the gap to only 1.2% of
national income in 2010.
* The subsequent period of austerity rolled back the size of the state – and
from 2012 did so more than in other countries, widening the gap with the G7
average to 5% of national income in 2019. But again, a global crisis – this
time COVID-19 – was associated with a particularly big increase in spending
in the UK.
* Despite cutting the levels of spending slightly from their pandemic peak,
government spending is expected to settle at a much higher level than before
the pandemic. This increase is forecast to be the fourth-highest increase out
of the 37 comparator countries over the period 2019–29.
* The size of the state is expected to settle at the average of the 36 other
comparator countries over the medium term and around 2.4% of national income
(or £66 billion in today’s terms) below the G7 average in 2029. If this
materialises, the gap between the UK and the G7 average in terms of spending
as a share of national income will have fallen by 5.6% of national income
between 2001 and 2029. Had the size of the UK state remained as far below the
G7 average as it was at the turn of the century, we would be spending around
£155 billion a year less.
RELATED CONTENT
2024 ELECTION WEBSITE
| 17 April 2024
*
*
*
GOVERNMENT REVENUES
* From 2001 until the pandemic, the UK’s government revenues were around 5% of
national income lower than the average of other countries. Over this period,
they increased slightly, but at a similar rate to other countries.
* A much bigger increase has been seen over the course of this parliament.
Together with current plans for the medium term, the increase in government
revenues since 2019 is forecast to be the biggest among the 37 comparator
countries and expected almost to halve the initial gap with the G7 average
from 5.3% in 2001 to 2.8% of national income by 2029. In contrast, the
average of all other comparator countries is forecast to fall slightly over
the medium term and be only 1.5% of national income above the UK in 2029.
This means that the UK would have to collect an extra £79 billion of revenue
in today’s terms to reach the average of the G7 – or £43 billion to reach the
average of the broader set of 36 countries.
*
*
*
HOW DOES THE UK’S BORROWING AND DEBT COMPARE WITH OTHER COUNTRIES?
We have shown that the UK’s 2.5% of national income increase in revenues
relative to the G7 average over the period from 2001 to 2029 would be much
smaller than the 5.6% increase in spending relative to the G7 average. Put
simply, our appetite to become a more average spender has not been fully matched
by a willingness to become a more average taxer. This contributed to a
substantial relative weakening of the public finances.
BORROWING
* The UK had its last budget surplus in 2001. At the time, this was the
11th-lowest level of borrowing out of the 37 comparator countries, and the
only other surplus in the G7 alongside Canada.
* Since 2005, the UK’s deficit has been consistently among the 10 biggest
deficits within the 37 comparator countries. A particularly big increase in
borrowing occurred during the financial crisis, reaching 10% of national
income in 2009. This was a deterioration of 7.4% of national income relative
to just before the crisis in 2007 – notably higher than the 6% deterioration
among the 36 comparator countries.
* Due to the relatively larger spending cuts through the 2010s, borrowing fell
almost to the G7 average in 2019, but the COVID-19 pandemic saw the UK
running the second-biggest deficit among the comparator countries in 2020.
* Above-average borrowing seen again during the pandemic is forecast to
continue into the medium term, with the 8th-largest deficit expected in 2029.
DEBT
* The UK’s level of debt was 27% of national income below the G7 average in
2001. The subsequent increase until just before the financial crisis was in
line with the average of G7 countries. However, many other comparator
countries reduced their levels of debt over this period.
* Debt in the UK grew comparatively faster during and after the financial
crisis, leaving it 7% below the G7 average in 2019.
* After the pandemic, the UK’s debt surpassed the G7 average for the first time
since the 1980s and reached the seventh-highest level as a share of national
income among the 37 comparator countries.
* Taken together, over 20-odd years and through three large shocks (the
financial crisis, the pandemic and the cost-of-living crisis), debt increased
by 62% of GDP between 2001 and 2023, which is the second-biggest increase
among the 37 comparator countries (only after Japan, where government debt
increased by 81% of GDP between 2001 and 2023).
* The forecast suggests UK government debt will continue growing and reach 5%
of national income above the G7 average and 55% of national income above the
average of comparator countries in 2029.
*
*
*
WEAK GROWTH MAKES FISCAL CHOICES HARDER
Public spending in the UK is now close to international comparators, but the
relative increase in revenues has been smaller. Levels of spending and tax are
never the whole story: successful fiscal policy will focus as much or more on
other factors such as how to make public services more productive and how to
remove unnecessary harmful distortions from the tax system. All the same, known
pressures on spending on areas such as health and social care are unlikely to
abate any time soon. But the economic environment suggests that public debt will
be even more difficult to sustain with the current levels of spending and
revenues going forward.
The UK’s per-capita growth outperformed the average of other G7 countries from
2001 until 2019 despite being hit harder by the financial crisis. But the UK is
now forecast to have the seventh-smallest cumulative growth among the 37
comparator countries in the period 2019–29. With low growth (and the era of very
low interest rates seemingly having come to an end), much tighter fiscal policy
is needed to get debt falling. After having already increased by more than any
other comparable country – with the notable exception of Japan – the IMF
forecasts the UK’s debt to continue growing rather than to be stable or even
decisively falling. If we want to spend similarly to other countries, we will
need to tax similarly too.
ENDNOTES
1. 1In addition to the G7, these include the EU27, Iceland, Norway,
Switzerland, Australia, New Zealand and South Korea.
Back to top
AUTHORS
Carl Emmerson
Deputy Director
Carl, a Deputy Director, is an editor of the IFS Green Budget, an expert on the
UK pension system and sits on the Social Security Advisory Committee.
Martin Mikloš
Research Economist
Martin is a research economist at TaxDev and works on taxation in developing
countries.
Isabel Stockton
Senior Research Economist
Isabel works in the Healthcare sector, and on the public finances. Their
research focuses on retaining and developing the NHS workforce.
COMMENT DETAILS
DOI 10.1920/co.ifs.2024.0011 Publisher Institute for Fiscal Studies
SUGGESTED CITATION
C, Emmerson and M, Mikloš and I, Stockton. (2024). Spending as much as other
countries but taxing less is unlikely to be sustainable [Comment] Institute for
Fiscal Studies. Available at:
https://ifs.org.uk/articles/spending-much-other-countries-taxing-less-unlikely-be-sustainable
(accessed: 29 November 2024).
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