IFG - The UK tax system needs urgent reform under any government
The UK tax system is in need of major structural reform if it is to meet the challenges of the future, says a new report by the Institute for Government.
Boris Johnson and Jeremy Hunt, the two candidates in the race to become the next Prime Minister, have proposed tax cuts – but neither has proposed the structural tax reforms needed to meet growing public spending pressures and changes in the economy.
Published yesterday, Taxing Times shows that growing public spending pressures and declining revenues pose a stark choice to future prime ministers and governments: without raising taxes or borrowing more, the scale or scope of public services will need to shrink. Our flawed tax system makes it harder to address this choice and calls out for reform.
This report outlines the growing need to reform the UK tax system. It is part of a new Institute for Government project examining the barriers to tax reform and how they can be overcome.
Our main conclusions include:
- Decades of piecemeal changes to the tax system have left it complicated, inefficient and beset with perverse incentives that do little to raise revenue or meet the Government’s wider economic objectives.
- Public finances will come under increasing strain in the coming years – stretching the tax system and creating pressure to raise revenues.
- The UK’s ageing population will increase demand for spending on health, adult social care and pensions. Were future governments to meet these demands without raising tax revenues or borrowing as a share of national income, spending on education, policing and defence would have to halve in size as a share of the UK economy over the next 50 years.
- Existing tax bases are being undermined by technological and behavioural change. In particular, the rise of fuel-efficient and electric vehicles and a reduction in smoking mean the Government will receive around £10 billion/year less revenue from fuel and tobacco duties by 2030/31 in today’s terms.
- The growth of lightly taxed activities is also threatening tax revenues. Self-employment and company owner-management, which are more lightly taxed than employment, have accounted for nearly one-third of workforce growth in the last decade.
- The dual challenges of growing public spending pressures and declining revenues mean future governments will face a stark choice: raise more revenue through taxation or additional borrowing, or reduce the scope and scale of public services.
- Our flawed tax system makes addressing these challenges more difficult. Sensible, principled reforms to the tax system could allow governments to raise revenues with fewer detrimental side effects, render the system more resilient to economic changes and ensure it is better placed to help meet the fiscal challenges ahead. Such reforms could be implemented alongside any government’s distributional or wider economic objectives.
Joe Marshall, Researcher at the Institute for Government and author of the report said: “It is not only the amount of tax revenue raised that matters. How it is raised is also important. Politicians of all political stripes must start thinking seriously – and speaking openly – about the need for tax reform and how they can help overcome the barriers that stand in the way of change."
Bronwen Maddox, Director of the Institute for Government, said: "Successive administrations have taken tax policy for granted. Given these changes underway – entirely foreseeable ones - we need to start taking tax policy seriously."
Notes to editors
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