How do you solve a problem like Britannia?



We are often reminded that death and taxes are two of life’s constants.  Sadly, I have had reason to contemplate the first in the last couple of weeks and I am reminded (at the risk of being trite) that we really do owe it to ourselves and each other to live our best possible lives as we simply do not know what is coming around the corner.

Of course, we are getting much better at keeping death at bay with advances in designed-in safety and healthcare, the latter of which is costing us all an ever-increasing slice of the national income. Which leads on to taxes.  I asked Bing’s AI – “Why the UK tax burden has increased since 1990” and its response was, of course, textbook:

Some possible reasons why UK taxes as a percentage of GDP are higher than in 1990 are:

  • The UK government has increased taxes or introduced new taxes to raise more revenue for public spending, especially on health and social care. E.g., it has raised VAT, introduced a bank levy, and increased income tax for high earners and NICs for self-employed workers.
  • The UK economy has experienced slower growth or contraction in some years due to factors such as the global financial crisis, Brexit uncertainty, and the Covid-19 pandemic. This means that GDP has grown less than tax receipts, resulting in a higher ratio of taxes to GDP.
  • The UK tax system has become more complex and less efficient over time, with many exemptions, reliefs, and loopholes that reduce the tax base and create distortions and inequalities. This means that the government has to raise tax rates or introduce new taxes to collect the same amount of revenue as before.

I then asked Bing a highly biased question (reflecting my low-tax view point!). “Why do high-tax economies grow slower than low tax economies”. Its answer:

The relationship between tax rates and economic growth is not clear-cut, as different studies may use different methods, data, and assumptions to measure the effects of taxes on growth. 

  • High tax rates have a negative impact on economic growth, as they reduce the incentives for work, saving, investment, and entrepreneurship. They also create distortions and inefficiencies in the allocation of resources, and may encourage tax evasion and avoidance.
  • Low tax rates have a positive impact on economic growth, as they increase the disposable income of households and businesses, and stimulate aggregate demand and consumption. They also enhance competitiveness and attract foreign direct investment.
  • Brookings (2012) found that the net impact of tax changes on growth is uncertain, but many estimates suggest it is either small or negative. Forbes (2017) found that there was no correlation between tax rates and economic growth in the US over a long period of time.
  • Some studies suggest that the impact of tax rates on economic growth can be improved by designing tax systems that are more simple, fair, transparent, and efficient. 

So, whilst Liz and Kwasi may have totally messed up the delivery, the message of tax reduction and simplification seems to me to be mission critical. To drive GDP growth we somehow need to square the circle of record government expenditure (much of it on people who may well be more usefully deployed elsewhere in the economy) with lowering taxes to stimulate growth, all whilst improving  delivery of public services.
AI and new technology could well be our saviour here, in the same way the steam engine was after the plague as it enables seismic changes in efficiency.  This will of course be very uncomfortable for millions of employees, but in the long run should result in improving the lot of the average British subject.

By Charles Whelan on 16/05/2023