UK Tax Burden Soars to Record Levels Amid Economic Turbulence
New forecasts indicate the UK's tax burden and government spending will reach historic highs, as inflation and global trade uncertainties loom.
The United Kingdom is poised to see its tax burden rise to unprecedented levels, according to projections from the Office for Budget Responsibility (OBR).
The tax burden, measured as a percentage of gross domestic product (GDP), is expected to increase from 35.3% in 2024/25 to 37.7% by 2027/28. This would mark the highest level since records began in 1948, surpassing the previous peak of 37.2% recorded in 1948/49. By October 2024, further forecasts suggest an even steeper rise, peaking at 38.3% in 2027/28, significantly above the pre-pandemic level of 33.2% noted in 2019/20.
The increase in the tax burden is primarily driven by personal taxes, particularly income tax and national insurance contributions.
Beyond the 2027/28 period, the OBR forecasts a stabilization of the tax burden at around 37.5% in the following two fiscal years, 2028/29 and 2029/30.
In tandem with rising taxes, total government spending as a percentage of GDP is projected to remain elevated, estimated at between 44% and 45% for much of the current decade.
This is nearly five percentage points higher than pre-COVID-19 spending levels, marking one of the longest sustained periods of high government expenditure since World War II. The spending ratio is expected to stay above 44% for a continuous stretch from the 2020/21 fiscal year through 2028/29, exceeding notable post-war spending periods in the mid-1970s and early 2010s.
Government investment is also forecast to exceed 2% of GDP annually for the remainder of the decade, reaching 2.6% in 2023/24, and potentially climbing to 2.7% in the following years.
This level of investment is unprecedented since the 1970s, with an anticipated seven consecutive years above the 2% mark.
Amidst these fiscal changes, household disposable income is expected to grow at an average of 0.5% annually from 2025/26 to 2029/30, although this rate conceals significant year-to-year variability.
After a predicted 2.6% increase in 2024/25, growth will slow to just 0.1% in 2027/28. Factors contributing to this reduced income growth include slower wage increases, inflationary pressures, and increases in household taxes as firms pass on costs from rising national insurance contributions.
Concurrent to domestic economic trends, the OBR has signaled that heightened trade tensions, particularly due to potential tariffs from the United States under President Trump's administration, could exacerbate economic challenges.
The most severe scenario could see the UK GDP decline by 0.6% this year and by 1% next year, should the UK and other nations implement retaliatory measures.
Even a lesser scenario, where the UK refrains from retaliation, anticipates a 0.4% reduction in growth this year.
Discussions concerning tariff negotiations between the UK and the United States are ongoing, as UK Trade Secretary Jonathan Reynolds recently visited Washington in an attempt to secure an economic deal.
However, no exemptions from steel tariffs were achieved.
Recent assessments from the OBR have also indicated that the government may fall short of its goal to balance the national budget without intervention.
Chancellor Rachel Reeves acknowledged the contributions of global uncertainties to economic instability, and set forth measures aimed at restoring fiscal headroom, including a projected £14 billion savings from welfare reforms and departmental spending cuts.
The downgraded growth forecast prompted suggestions of greater volatility in government spending and borrowing, as the government prepares for varying economic scenarios in the future.
UK economic growth forecasts have been significantly revised downward, with the OBR now projecting only a 1% growth rate by 2025, a halving from earlier projections.
Inflation estimates have risen as well, with the OBR forecasting an average inflation rate of 3.2% for this year, driven by ongoing global economic pressures.
These economic conditions present considerable challenges for the UK as it navigates fiscal policy and international trade dynamics.
The tax burden, measured as a percentage of gross domestic product (GDP), is expected to increase from 35.3% in 2024/25 to 37.7% by 2027/28. This would mark the highest level since records began in 1948, surpassing the previous peak of 37.2% recorded in 1948/49. By October 2024, further forecasts suggest an even steeper rise, peaking at 38.3% in 2027/28, significantly above the pre-pandemic level of 33.2% noted in 2019/20.
The increase in the tax burden is primarily driven by personal taxes, particularly income tax and national insurance contributions.
Beyond the 2027/28 period, the OBR forecasts a stabilization of the tax burden at around 37.5% in the following two fiscal years, 2028/29 and 2029/30.
In tandem with rising taxes, total government spending as a percentage of GDP is projected to remain elevated, estimated at between 44% and 45% for much of the current decade.
This is nearly five percentage points higher than pre-COVID-19 spending levels, marking one of the longest sustained periods of high government expenditure since World War II. The spending ratio is expected to stay above 44% for a continuous stretch from the 2020/21 fiscal year through 2028/29, exceeding notable post-war spending periods in the mid-1970s and early 2010s.
Government investment is also forecast to exceed 2% of GDP annually for the remainder of the decade, reaching 2.6% in 2023/24, and potentially climbing to 2.7% in the following years.
This level of investment is unprecedented since the 1970s, with an anticipated seven consecutive years above the 2% mark.
Amidst these fiscal changes, household disposable income is expected to grow at an average of 0.5% annually from 2025/26 to 2029/30, although this rate conceals significant year-to-year variability.
After a predicted 2.6% increase in 2024/25, growth will slow to just 0.1% in 2027/28. Factors contributing to this reduced income growth include slower wage increases, inflationary pressures, and increases in household taxes as firms pass on costs from rising national insurance contributions.
Concurrent to domestic economic trends, the OBR has signaled that heightened trade tensions, particularly due to potential tariffs from the United States under President Trump's administration, could exacerbate economic challenges.
The most severe scenario could see the UK GDP decline by 0.6% this year and by 1% next year, should the UK and other nations implement retaliatory measures.
Even a lesser scenario, where the UK refrains from retaliation, anticipates a 0.4% reduction in growth this year.
Discussions concerning tariff negotiations between the UK and the United States are ongoing, as UK Trade Secretary Jonathan Reynolds recently visited Washington in an attempt to secure an economic deal.
However, no exemptions from steel tariffs were achieved.
Recent assessments from the OBR have also indicated that the government may fall short of its goal to balance the national budget without intervention.
Chancellor Rachel Reeves acknowledged the contributions of global uncertainties to economic instability, and set forth measures aimed at restoring fiscal headroom, including a projected £14 billion savings from welfare reforms and departmental spending cuts.
The downgraded growth forecast prompted suggestions of greater volatility in government spending and borrowing, as the government prepares for varying economic scenarios in the future.
UK economic growth forecasts have been significantly revised downward, with the OBR now projecting only a 1% growth rate by 2025, a halving from earlier projections.
Inflation estimates have risen as well, with the OBR forecasting an average inflation rate of 3.2% for this year, driven by ongoing global economic pressures.
These economic conditions present considerable challenges for the UK as it navigates fiscal policy and international trade dynamics.
