The UK government's revenue as a share of national income is set to reach near historic levels, according to a recent report by the Institute for Fiscal Studies (IFS). The analysis indicates that by the fiscal year 2028-29, total government revenues are projected to stand at 37.1% of national income. This figure positions the current tax burden at a level not seen consistently since the late 1940s, highlighting a significant and sustained increase in the proportion of the economy collected by the state.
A notable shift in the composition of these revenues has occurred, with income tax and National Insurance contributions (NICs) now forming the bedrock of the Exchequer's income. These two taxes combined are expected to contribute approximately half of all government revenues, a substantial increase from previous decades. This rise is largely attributable to the government's policy of freezing tax thresholds, which, combined with inflation and wage growth, pulls more individuals into higher tax brackets, a phenomenon known as fiscal drag.
The IFS report also details a projected increase of 4.6 percentage points in the tax burden compared to pre-pandemic levels. This substantial rise reflects a period of significant economic upheaval and government spending commitments. While income tax and NICs have seen their share grow, other revenue streams have experienced varying fortunes. Corporation tax, for example, has seen its contribution rise due to increased rates, while Value Added Tax (VAT) has seen its share decline slightly relative to national income.
Fuel duties, once a significant contributor, have experienced a marked decrease in their share of government revenue. This decline can be attributed to a combination of factors, including the long-standing freeze on fuel duty rates and improvements in vehicle fuel efficiency, which reduce the amount of fuel purchased and taxed. This long-term trend poses a challenge for future governments seeking to maintain revenue from motoring, especially as the transition to electric vehicles accelerates.
The findings have significant implications for public discourse surrounding the cost of living and the role of the state. As the general election approaches, both the Conservative government and the Labour opposition will face scrutiny over their plans for taxation and public spending. The current trajectory suggests that any future government will inherit a high tax burden, making commitments to tax cuts potentially challenging without corresponding cuts to public services or increased borrowing.
The IFS's detailed breakdown provides crucial context for understanding the current fiscal landscape and the choices facing policymakers. It underscores the extent to which the UK's tax system has evolved and the profound impact these changes have on households and businesses across the country.