How much can a government tax?

We now know what Labour thought the answer was to this problem. Over the thirteen years of left of centre government the maximum tax take was in 2007-8, when taxes took 36.4% of all our incomes or GDP. This compared with the Conservative high of 38.2% in 1982-3 when the then Conservative government was tackling the large inherited debt from the previous Labour government, and with the 31.8% low the Conservatives got it down to at a later date. Labour inherited 34% and always charged more than that in their thirteen years.

This is why the new government is right to say we have to cut spending. Spending is running near to 50% of GDP. It needs to be realistic in relation to possible tax levels which are more than 10% of GDP lower. Why should we think suddenly the UK economy can sustain taxes of more than 40% of GDP when no previous government in the last 40 years has thought that possible? Who would stay to pay them? Who would carry on working hard and risking and investing more in such a climate? It’s a very competitive world economy, and our main economic competitors already have income taxes and capital taxes well below ours.

The result of Mr Budd’s likely revisions to our forecasts today will be to raise the deficit by lowering the forecasts of future tax revenue from slower growth. If slow growth is our problem – as I believe it is – the correct response is to cut the tax rates on saving, investing, working and creating jobs, not to increase them. Just as the England football team needs strikers to score more goals as well as a goalkeeper to make more saves, so the UK economy needs a bigger tax base as well as less public spending. We need better Treasury control of the spending, and a better private sector performance to bring the money in.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

21 Comments

  1. Richard1
    Posted June 14, 2010 at 8:36 am | Permalink

    I hope the OBR will also be conducting an audit of the true level of govt debt. A debate about the deficit is only part of the story – we also need to know what the total debt picture is. We hear continually on the airwaves from left-wing politicians and the occasional left-wing economist that Debt/GDP is only 60% – much lower than at the end of WWII or currently in Japan, and therefore cuts are not necessary. This nonsense should be exposed. True debt/GDP in the UK on any reasonable measure is well over 100% and rising fast. (The Japanese figure on a net basis is much lower and most historical comparions are meaningless).

  2. Norman
    Posted June 14, 2010 at 9:36 am | Permalink

    This isn't aimed at you, but your headline sums up what I believe the focus has shifted far too much towards. Rather we should be asking (as you do time and again, one of the few voices who do) 'How little can we spend'.

    I'd have liked to see (but forlornly as no government will ever do this), rather than Labour's laughable Fiscal Responsibility Bill (the one to reduce the deficit, whatever it was called), a Bill along the lines that Friedman proposed in limiting government spending to a fixed percentage of GDP – 30% sounds good to me. However you raise it, borrowing, taxation, I don't care, just don't spend more than 30% of my money for me and I'll be happy.

    It's one thing to have no deficit but if you're taxed up the wazoo it's hardly a pleasant situation. Let me spend my own money, please. I think I can be trusted with it.

    • lola
      Posted June 14, 2010 at 10:11 pm | Permalink

      Seconded

    • JohnW
      Posted June 16, 2010 at 12:22 pm | Permalink

      The US has a similar bill. They simply raise the ceiling every year.

  3. billyb
    Posted June 14, 2010 at 9:59 am | Permalink

    "our main economic competitors already have income taxes and capital taxes well below ours"

    lets see them then!

  4. Acorn
    Posted June 14, 2010 at 10:57 am | Permalink

    As we are recycling today, I recycle this one.

    UK government’s “primary balance” is minus 9% of GDP, according to BIS; about £120 billion DEFICIT. (Primary balance = government spend – debt interest payments – government income; circa 704 – 43 – 541).

    (1). According to BIS we need a budget SURPLUS of 5.8% of GDP to stabilise the debt, over ten years, at the level we had in 2007. So we have to remove the deficit of £120 billion and a further £77 billion, from the government spend. The 77 billion pays the interest on our debt of 43 billion leaving 34 billion to start paying down the debt, back to 2007 level, in ten years.

    (2). And a quote from David B Smith's IEA report.
    "… There are signs of business cycle fluctuations in the tax ratio, as one would expect with a progressive tax system, but it does look as if 40% or so represents, as an approximate rule-of-thumb, the economic limit to the taxable capacity of the non-oil economy. One reason is that the ratio of non-oil tax receipts to non-oil private sector GDP measured at factor cost was running at a crippling 81.4% last year …"

  5. nonny mouse
    Posted June 14, 2010 at 12:42 pm | Permalink

    What we really need is a referee. Someone to give out yellow and red cards when the deficit gets too high.

    If inflation gets too high then the BOE is forced to write a letter explaining why it got that way.

    How about changing the constitution so that if the deficit is >3% and increasing then the chancellor is forced to specify how he intends to fix it, and if it is >6% then he is forced to resign and/or the government is forced to go to the country to get a fresh mandate.

  6. Robert
    Posted June 14, 2010 at 12:57 pm | Permalink

    Is there a typo in the first para – should it be 46.4?

  7. FaustiesBlog
    Posted June 14, 2010 at 1:04 pm | Permalink

    Why should we think suddenly the UK economy can sustain taxes of more than 40% of GDP

    Why should we accept tax on labour at all? It is legalised theft. It is serfdom. One's labours should NOT be taxed. The government does way too much and should be pared down to the bare minimum.

  8. Matthew Reynolds
    Posted June 14, 2010 at 2:01 pm | Permalink

    We should expand the tax base by cutting top rates of income tax,ending CGT and reducing corporate taxes so as investment and productivity rise,avoidance falls revenues rise.That would pay down debt as would Canadian style cuts of say £140 billion.A combination of a smaller state and lower tax rates producing a Laffer Curve effect.Capital Gains should be taxed as income for the first five years and then be tax free after then.Business capital gains should be taxed as corporate profits for the first five years and then be tax free thereafter.That would encourage longer-term investment and more economic stability while simplifying taxation.Corporate taxes are cut from 28%&21% to one 15% rate to act as a spur to private investment while making taxes simpler if enough tax breaks where axed to streamline things.That would ensure that investment decisions where made more efficiently without complex taxes distorting things.To woo entrepreneurs and rich wealth creators to come to the UK top rates of tax should be cut from 50%&40% to one 35% rate on incomes exceeding £200,000 p/a while the claw-back on the basic personal allowance & raid on rich peoples pension funds must be axed.

    The rich would pay a bigger share of tax as for tax reasons there would be more in the UK with less of a reason to engage in tax dodging.We need more revenue with the rich paying more.That way we can protect public services,eat into the PSBR while not imposing any more excess imposts on the poor & middle classes.If they are going to lose out under spending cuts then it is very unfair to expect them to fill the revenue gap caused by the rich migrating for tax reasons ( and thus costing HM Treasury money).We need to tempt the rich into the UK to pay down the debt-simple as that.

    • Max Van Horn
      Posted June 15, 2010 at 10:02 am | Permalink

      Thank God for a breath of common sense.

  9. Vince Causey
    Posted June 14, 2010 at 4:03 pm | Permalink

    "Over the thirteen years of left of centre government the maximum tax take was in 2007-8, when taxes took 36.4% of all our incomes or GDP. "

    And the only reason Labour was able to keep the tax take this "low" was by running a multi year budget deficit.

    • nonny mouse
      Posted June 14, 2010 at 9:11 pm | Permalink

      That was OK because they were only borrowing to "invest".

      A dictionary definition of invest is "to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value."

      The Labour definition of "Investing" means nurses salaries, teacher salaries, war in Iraq.

      Hopefully the OBR or IFS can help us remember what "investing" actually means.

    • Matthew Reynolds
      Posted June 15, 2010 at 10:33 am | Permalink

      Correction the fiscal deficit is very high because public spending surged far faster than the nation could afford.The public sector grew in size (i.e. expanded by more than GDP's average annual expansion) as Labour sought to increase reliance on it for political purposes.There is nothing progressive about sucking the potential out of the economy with Big Government crowding out private consumption and investment.The lower the economic growth the bigger the impact the poorer you are while the Middle Classes cream off the benefits of higher public spending.There is nothing moral in raising public spending and imposing horrendous bills on future generations to fund bribing client state recipients into voting Labour.Taxes do not sound low as thresholds for stamp duty & IHT failed to keep pace with property prices,tax thresholds did not keep with earnings,fuel duties rose,Council Tax doubled,10% tax band got axed,50% tax band came in,pension funds got hit for £5 billion a year,NI rates rose by 2p in the £,CGT went up by 80% at one stage and corporate taxes are dangerously high & complex.That is not a low tax Utopia at all.It was when Brown started raising taxes and let spending rip that the public finances moved into the red.Higher tax rates just maximize incentives for evasion and depress productivity.Public sector productivity has fallen,poverty & economic inactivity are very high and the economy is less competitive than 13 years ago.A poor return after all that socialist taxing,borrowing and wasting.

      Lets hope that the Emergency Budget can correct this terrible legacy !

  10. lola
    Posted June 14, 2010 at 10:15 pm | Permalink

    Rule of thumb. Government is, at its very best, 50% efficient. And it does at least twice what it should. Ipso fatso government spending should be ~ £200Bn, not £800 Bn (ish). Taxes would then be 10%. That is 'tithes'. The ancients knew a thing or two and 10% tax works for me.

  11. Caratacus
    Posted June 15, 2010 at 8:45 am | Permalink

    Can't understand this cart-before-the-horse philosophy regarding taxation. Well, I can but the conclusion is not very complimentary towards politicians.

    My wife has sound financial values which have kept the Caratacus economy on a sound footing these many years. Here is a typical exchange:

    Me: "Darling, I'd like to buy a new motorbike".
    Mrs. C: "Can we afford it?"
    Me: (casting meaningful glance towards flowers bought earlier that day, and pretending to evaluate the various competing areas of need within the household budget) "Mmmm – not really…"
    Mrs.C: Well you can't have it then".

    Message: compile a list of what the country needs (not wants), work out how much that would require in taxation, adjust taxation accordingly. There – Mrs.C would be proud of me.

  12. Lucy Parfait
    Posted June 15, 2010 at 9:15 am | Permalink

    36.4%- 38.2%-31.8% – a lot but not too bad sounding. Factor in all the other taxes, charges and hidden costs of government and we are closer to 80% taxation. Just consider how much a business factors into anything you buy- council tax, nat ins, fuel duty, planning permissions, insurance tax, licences, all before VAT is added on top.It adds up to a vast addition to everything we buy. I've just come back from Chile and Brazil and virtually everything is much cheaper in both countries and yet things still work, roads are not much worse than here, health care and housing are vastly cheaper. What are we paying for?

  13. christina sarginson
    Posted June 15, 2010 at 12:51 pm | Permalink

    There are somethings which we need in this country and some things we just want. I am happy to pull my belt in and do my fair share of work and pay my taxes where I need too. However, when I work hard I want to have some money for myself. I have been a widow for a number of years. I pay tax on my widows pension and then a large amount on what i earn I never minded this as I want to live in a country where we look after our community but I do WANT some money left and dont need to be taxed anymore.

  14. adam
    Posted June 15, 2010 at 4:12 pm | Permalink

    The UN’s Intergovernmental Panel on Climate Change misled the press and public into believing that thousands of scientists backed its claims on manmade global warming, according to Mike Hulme, a prominent climate scientist and IPCC insider. The actual number of scientists who backed that claim was “only a few dozen experts,” he states in a paper for Progress in Physical Geography, co-authored with student Martin Mahony.

    “Claims such as ‘2,500 of the world’s leading scientists have reached a consensus that human activities are having a significant influence on the climate’ are disingenuous,” the paper states unambiguously, adding that they rendered “the IPCC vulnerable to outside criticism.”

    Hulme, Professor of Climate Change in the School of Environmental Sciences at the University of East Anglia – the university of Climategate fame — is the founding Director of the Tyndall Centre for Climate Change Research and one of the UK’s most prominent climate scientists. Among his many roles in the climate change establishment, Hulme was the IPCC’s co-ordinating Lead Author for its chapter on ‘Climate scenario development’ for its Third Assessment Report and a contributing author of several other chapters.
    http://fullcomment.nationalpost.com/2010/06/13/th

  15. @ElliotKane
    Posted June 16, 2010 at 11:43 am | Permalink

    I completely agree, Mr Redwood. I wish more other politicians had your sense on this issue.

  16. Guest
    Posted June 25, 2010 at 1:24 am | Permalink

    "Over the thirteen years of left of centre government "

    I had to stop reading when I came to the above. Its just not true and you John Redwood know that. There is nothing "left" about NuLab. Many in the tory party used to spit blood that Blair was not the leader off the tory party. Indeed, the tory party supported 100% the first eleven years of NuLab economic policy, as Nigel Lawson has admitted to. I just wish we had some honest politicians, like Ian Gilmour, God rest his soul. I thought more of you then that Mr Redwood.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page