We can't afford the government

We want those entitlements, we want low taxes, we want extravagant public services. We want cake and to have eaten that cake. We can’t afford our government but we will pretend we can.

We can’t afford our government. I know there are people who’ll tell you that a little more vigorous squeezing of the rich’s pips will produce the taxes to pay for everything but this really isn’t true. It isn’t true even if the rich cannot simply go somewhere else to pay their taxes.

The Office for Budget Responsibility (OBR) publishes a guide to the UK’s government spending. This handy document starts with telling us that the government plans to spend in 2024-25 around £1,226,000,000,000. You’ll agree that this is a very large amount of money. The OBR helpfully show us just how unaffordable all this spending is:

“In 2024-25, we expect public spending to amount to £1,226 billion, which is equivalent to around £42,000 per household or 44.0 per cent of national income.”

The Office for National Statistics (ONS) tells us that the median household income for the UK in 2021 was £35,000. It won’t have changed a great deal in the subsequent three years. The ONS also tells us that the effect of taxes and benefits is to increase the median household income to £38,100. Obviously all those rich people whose pips Dennis Healey wanted to squeeze are making up the difference because someone has to make up the gap between the median household income and the amount of money the government wants to spend. Part of the gap is borrowed (£87,000,000,000 according to the OBR) but the remainder comes from taxing the rich, property taxes, levies on business and taxes on our spending (VAT, fuel duty, stamp duties etc). We know that the top 1% of income earners in the UK pay 28% of all income taxes and we also know that 45% of capital gains tax is paid by just 1% of those liable for this tax. A back of an envelope estimate is that the income and capital taxes paid by the richest 1% amount to about 15% of all tax income.

It isn’t just that Britain has its highest tax burden for 50 years but that this tax is being raised from fewer people. The Institute for Fiscal Studies (IFS) commented after the recent budget that:

“...the overall tax burden really is heading to record levels. It was stable at about a third of national income from 2010 to 2019. It has risen by a hefty 3 per cent of GDP, about £75 billion, since then — a record increase over a single parliament. It is higher this year than at any time since 1950. That is quite a trick to pull. The overall tax burden close to an all-time high. The direct tax take from an average earner (is) at its lowest in half a century.”

Were government spending predictable then this would all be fine. But it isn’t. Years ago commenters on the US Federal Budget created the idea of ‘relatively uncontrollable spending’. Here is the Tax Foundation from was back in 1975:

“Today about three-fourths of all Federal government spending — primarily domestic assistance outlays — are classified as “relatively uncontrollable” by either Congress or the Executive Branch under existing laws”

Put simply, a huge proportion of public spending is on demand-driven entitlements and services. In the case of entitlements the state has granted a ‘right’ to receive some benefit or service meaning that, in any given period, a government has to make the payment regardless of the amount of money in that government’s budget. For services the reverse is true meaning that increased demand results in a queue (we see this with NHS waiting lists). Inevitably the subsequent budget seeks to remedy the problem of the queue by giving the service more money - usually with associated noises about reducing waste and promoting efficiency.

In the UK we plan to spend £315.1bn on funding benefit entitlements which is about 26% of total spending. In addition the main demand driven service, health and social care, will spend a further 15% of the budget. There is no prospect of health spending reducing, indeed the pressure of an ageing population (the second wave of baby boomers, those born between 1955 and 1964 are now entering peak demand for health support). The health needs of those baby boomers are putting pressure on the benefits system.

We can expect, over the next few years, that without substantial reforms the amount we spend on benefits and health will need to rise. Politicians, however, repeatedly promise not to increase the principal taxes - income tax, VAT, national insurance - meaning that the only sources of finance are new taxes, fiscal drag and other departmental budgets. And anyone involved in English local government over recent years knows how this ends - because raising taxes is unpopular (and, for councils, capped) decisions are made to limit or even reduce departmental budgets so as to fund entitlements and demand-led services. So much of the rhetoric about ‘austerity’ simply reflects how this has occurred across the public sector.

In order to cope with demand for entitlements and ‘free’ services governments have reduced the size of the armed forces, cut back on maintaining roads, and hobbled local government visible services. And the government has created new fiscal pressures by binding its own hands over Net Zero targets and equalities. Moreover the expectation for budget planners within the NHS and the projections from the IFS and others is that health spending will need to rise by at least 50% between now and 2033 (in 2018 the IFS projected the need for the NHS budget to increase from £154bn to £278bn - and 80% increase).

The same pattern is seen in other areas. Not only has the government guaranteed increases in the old age pension but the number of pensioners is set to rise. And, with the age of entitlement to that pension rising to 67, there will undoubtedly be further increases in demand for disability benefits. Housing pressures don’t just cause problems for local councils meeting their duty to house those at risk of homelessness, they also push up demand for housing benefit. And the welcome improvement to the life expectancy of disabled people adds again to the costs for local councils and the demand for benefits. Despite the oft heard rhetoric about lazy scroungers this really doesn’t apply to those I’ve described. Benefits spending - without any changes to criteria for entitlements - are likely to rise by at least £39bn in real terms by 2030.

Just to run government as it is right now will require, according to left-wing think tank, the Centre  for Progressive Policy, a real terms increase in spending of £142bn by 2030. If a government doesn’t want to run on borrowing, then this requires taxes to rise by 12% or other departmental budgets to fall significantly (bear in mind that £142bn is more than the whole of the defence and education budgets). And this is without taking account of other entitlements such as free childcare or a panoply of promises to activist groups - everything from foreign aid and dealing with refugees to subsidising rail and bus travel. 

In the short term our government will creak on, there’ll be budget day rabbits pulled from hats, and we’ll look at the minutiae of who is a winner or a loser on budget day. But by 2030 (probably made even worse by Net Zero promises) entitlements, health spending and other demand-led services will have grown from around 40% of the budget to over 50%. And it still won’t be enough. There will still be sorry tales of living on benefits, the NHS will still have waiting lists and mismanagement, and less ‘important’ services will have been cut to the bone. Charities, NGOs and assorted campaigners will still use misfortune as a lever to get politicians to promise more funding. And nobody will look at the government saying ‘it has no clothes on’. 

Levels of taxation, borrowing and spending by the state will act to further slow down economic growth. KPMG projects that UK economic growth this decade will average 1% per year. And, if perchance that rate of growth ticks up to 1.1% it will be presented as a huge triumph for the government’s policies. Meanwhile the size of the state grows at 2% per year eating into people’s wealth, making borrowing more expensive, hobbling entrepreneurs and  driving away innovators. Nothing will change. We want those entitlements, we want low taxes, we want extravagant public services. We want cake and to have eaten that cake. We can’t afford our government but in our Micawberish way, we will pretend we can until something breaks.