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Epidemics

Rishi Sunak's Tax-and-Spend Plan: Expansion of the State and Rising Tax Burden

Strategic Insights

— 2 min read

Rishi Sunak's commitment to cut taxes and limit the government's role has been overshadowed by his pledge to expand the state and increase public spending. Despite promising to reduce taxes in the future, Sunak is set to oversee an unprecedented expansion of the state, with day-to-day spending on public services increasing by 3.3 per cent in real terms. This, coupled with changes to in-work benefits, will take total government spending from 39.8 per cent of GDP before the pandemic to 41.6 per cent of GDP by 2026-27, the highest sustained level since the 1970s.

Key Takeaways:

  • The yearly real terms increase of 3.3 per cent in day-to-day spending on public services will take total government spending from 39.8 per cent of GDP before the pandemic to 41.6 per cent of GDP by 2026-27.
  • This level of spending will be the highest sustained since the 1970s, before the privatisations of the Thatcher era.
  • The tax burden will increase from 33.5 per cent of GDP before the pandemic to 36.2 per cent of GDP by 2026-27, the highest level since the postwar period.
  • Richard Hughes, chair of the Office for Budget Responsibility, stated that Sunak has announced more tax rises than in any single year since Norman Lamont and Ken Clarke's two 1993 Budgets in the aftermath of Black Wednesday.
  • The main driver of the pressure on public finances will be the sharp rise in costs of pensions, health, and social care, equivalent to 5.5 per cent of GDP by 2050.
  • Torsten Bell, director of the Resolution Foundation, noted that the pandemic has made the economy smaller than expected, so the government is spending more due to a higher tax form of conservatism than expected.
  • The biggest change in the state's shape will be the increased 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.
  • Increases to departmental budgets for day-to-day spending were "broadly comparable" to those awarded by Labour governments in the early 2000s, according to the Institute for Fiscal Studies.
  • Most of the increase in public spending stems from the sharp rise in capital investment announced at the start of the pandemic, which will pay off in the longer term.

Statistics:

  • Real terms increase of 3.3 per cent in day-to-day spending on public services.
  • Total government spending will increase from 39.8 per cent of GDP before the pandemic to 41.6 per cent of GDP by 2026-27.
  • Tax burden will increase from 33.5 per cent of GDP before the pandemic to 36.2 per cent of GDP by 2026-27.
  • Share of spending going to health and social care will rise to 8.4 per cent of GDP by 2024-25.
  • Increase in pension costs, health, and social care costs will be equivalent to 5.5 per cent of GDP by 2050.
  • Government revenue as a percentage of GDP, 2021: 34.6 (source: OBR).

Sources:

  • Straus, Delphine. "Rishi Sunak's Tax-and-Spend Plan: Expansion of the State and Rising Tax Burden."

Source: Straus, Delphine.

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