Wealth taxes will be needed to fund a £76bn a year increase in government spending by the end of the decade, caused by an ageing population and more expensive healthcare, a thinktank has said.
The Resolution Foundation said the UK was on course to see the size of the state match that of Germany by 2030, and warned new methods of raising money to pay for higher spending would be needed.
While stressing public spending pressures were nothing new for Britain, the thinktank said previous ways of raising money – such as reducing defence spending and raising national insurance contributions – would no longer be feasible.
It predicted the government’s pension bill would rise by £24bn a year because the baby boomer generation would be retiring and people would be living longer. Extra pressures on the NHS resulting from demographic change would cost an additional £52bn.
As a result, public spending would rise to 44% of the economy’s gross domestic product, up from 42% currently. Germany’s public spending pre-Covid was 45% of GDP.
The Resolution Foundation said it was vital to avoid a repeat of the period after the financial crash, when slow growth drastically reduced tax revenues. It concluded that wealth – which had grown from three times national income in the early 1980s to eight times currently – was under-taxed.
Dan Tomlinson, a senior economist at the Resolution Foundation, said: “The swift demographic change that Britain will experience in the 2020s alongside rising health costs is set to increase public spending by £76bn a year. We’ll all benefit from people living longer, healthier lives – as well as reducing our carbon footprint – but it will have to be paid for.
Tomlinson said that over the past seven decades, the UK has expanded the NHS, the state pension and education spending, and managed those costs by shrinking the army and growing the size of the state on the back of higher national insurance contributions.
“We’re unlikely to be able to simply repeat that approach in future,” he said. “We’ll need to tax income more efficiently and fairly, and find new sources of tax revenue such as from better taxing wealth.”
