An advocacy group crunches the numbers about tax burdens and suggests the UK burden of tax is now at the highest level since the Labour administration of Harold Wilson. A thought to ponder ahead of the 12 December poll.

This publication has studiously avoided taking sides on the UK’s departure from the European Union and indeed Thursday’s general election. It is probably fair to assume that hardly any wealth management firms are fans of the Labour Party leader Jeremy Corbyn and his plans to hit “the rich” as well as massively expand public spending. But it is worth taking time to note that, for all the vaunted pro-free market credentials of the governing Conservative Party, the record on tax in this and previous administrations suggests that there is a gap between rhetoric and reality. 

The free market-leaning group, The Taxpayers’ Alliance, argues that irrespective of whoever wins the election, the tax burden will be higher than it has been under almost any post-war prime minister. The TPA ranks each post-war British premier by their effect on the tax burden, or national account taxes as a proportion of gross domestic product. Boris Johnson, the TPA said in a report yesterday, has “presided over the highest tax burden of any Conservative leader on record”, at 34.4 per cent of GDP. 

The TPA goes on to state that Conservative manifesto spending commitments mean that this burden is set to rise to an average of 34.7 per cent of GDP by 2023-24. The Labour manifesto suggests that Jeremy Corbyn will impose the highest tax burden ever recorded (37.3 per cent of GDP), even higher than it was under Clement Attlee in the aftermath of the second world war (35.8 per cent of GDP).

When different administrations’ records are analysed, it shows that Conservatives have tended to reduce the tax burden, while Labour has tended to increase it, with polling showing that the public tends to have more respect for recent Tory tax-cutters. Even so, the data might surprise some people. 

The four most recent prime ministers who have presided over the highest average tax burdens (as a percentage of GDP) since Clement Atlee were 1) Clement Attlee (35.8 per cent); 2) Boris Johnson (34.4 per cent); 3) Theresa May (34.1 per cent); 4) David Cameron (33.3 per cent); 5) and Gordon Brown (33 per cent). The tax burden (as a percentage of GDP) has been lowest under Conservative prime ministers: 1) Harold Macmillan (28.7 per cent); 2) Alec Douglas-Home (28.7 per cent); 3) Anthony Eden (29.1 per cent); and 4) John Major (29.7 per cent).  

The figures suggest that since John Major’s administration (1992-97) the burden has moved remorselessly higher, through Tory, Tory-Liberal Democrat and Labour administrations. An underlying driver would seem to be rising pressures on entitlement spending, particularly pensions and healthcare as the population ages. Another factor has been that since 2008, in particular, economic growth has not been strong, whereas in some previous decades the burden/GDP ratio was kept lower simply by the government holding spending, rather than cutting it. 

The percentage-of-GDP way of measuring the burden does not, of course, show how taxes are collected and how progressive or regressive a tax regime is. This is clearly relevant for a wealth management audience. At the end of the 1970s, for example, top rates of tax bordered on total confiscation, while under Thatcher, the top income tax was slashed in stages to 40 per cent. On the other hand, VAT, aka sales tax rates, have risen. The mix of tax rates is important in driving incentives to save, work and invest, even when the overall burden stays broadly the same. 

Even so, the latest figures ought to put rhetoric about “austerity” and the like into historical context. 

“The fact that the tax burden is already at a 50-year high should give us a wake up call in this election campaign. As it stands, both potential PMs will be whacking up taxes to higher rates than any of their post-war predecessors from their respective parties. Corbyn‘s hikes would be enough even to make [Harold] Wilson wince,” John O'Connell, chief executive of the TPA, said. 

Rankings of economic freedom
There are other measures casting light on how well, or not, the UK does in terms of economic freedom, which of course is affected by tax. For example, In the 2019 Index of Economic Freedom, published by the US-based Heritage Foundation, the UK ranks seventh, with an improved score and above the US. Top in that ranking is Hong Kong (possibly to change given its political turmoil), followed by Singapore, New Zealand, Switzerland, Australia and Ireland. Also in the top 10 are Canada, the United Arab Emirates and Taiwan. (As the rankings might suggest, political and civil liberties are not included.)

The tax burden data from TPA might give some who claim that we live in an era of untrammelled capitalism, or “neoliberalism”, pause for thought. The truth is messier and more complex.