A question of spending

The question at the heart of current UK fiscal debates is whether the UK's commitment to high spending leads to high taxes and high borrowing.

 Public spending has recently risen sharply. Since 2020, UK government spending has been historically high, first because of COVID-19 support schemes, then energy subsidies, and now higher defence, welfare, and NHS costs.

The current position is that public spending is now over 44% of GDP, compared to around 39% before the pandemic.

It is driven partly by an ageing population that leads to more spending on pensions and healthcare. The triple lock on pensions is a significant contributor.  

Debt interest payments have been rising owing to high inflation and interest rates. And there are public sector wage pressures and the need to spend on infrastructure.

The high spending has led to higher taxes, leading to a record tax burden. The UK’s overall tax take (as a share of GDP) is at a 70-year high, about 37% of GDP, the highest since the 1940s. This because the government has raised personal and business taxes to stabilize public finances.

Corporation tax rose from 19% to 25% in 2023, and frozen tax thresholds mean fiscal drag, with more people paying higher income tax rates as wages rise.

The result has been to make taxes now higher than in most advanced economies except the Nordic countries. But borrowing remains high despite higher taxes. Even with record taxes, the government still runs a budget deficit with spending exceeding revenue.

In 2024–25, borrowing is forecast to be about 4–5% of GDP, well above pre-pandemic norms. And public debt is now over 100% of GDP - the highest since the 1960s.

This has raised debt servicing costs, with rising interest rates making debt far more expensive, and squeezing budgets further.

The structural challenge is that the UK is spending more than it sustainably raises in revenue, so both taxes and borrowing are elevated:

High spending leads to high taxes and still high borrowing. The fiscal gap reflects long-term structural pressures, not just temporary shocks.

The political and economic implications are unpleasant. Future governments face a tough trade-off, either to cut spending (e.g., on welfare, health, or local services), or to raise taxes further, and accept continued high borrowing.

The economic impact is that persistent high taxes dampen growth; while high borrowing keeps interest rates and debt costs elevated.

The UK’s commitment to high public spending has led to both high taxes and continued high borrowing. Taxes have risen to record levels, but spending pressures, especially from debt interest and health, mean that deficits remain stubbornly large.

All of which brings us to the next big question: Can anyone do anything about it? It seems that the current answer is no. But things may change.

Madsen Pirie