UK Needs to Raises Taxes Even Further

July 15, 2011 Taxation in UK

Tax Increase in the UKThe UK government urgently needs to instate a series of permanent tax rate increases, and follow a program of heavy cuts of spending , in order to avoid a debt crisis, such as the one faced by Greece.

On July 13th the Office of Budgetary Responsibility (OBR) presented its annual Fiscal Sustainability Report to the UK parliament. According to conclusions drawn in the report, the UK needs to increase income taxes by an extra 12 percent in order to raise the revenues necessary to pay off the growing national debt.

The tax hike will need to be complemented by a significant and extensive austerity program. According to the OBR, government spending cuts and tax raises might need to be as high as GBP 50 billion per year for the next 50 years, in order to stave of a debt default. Even if the tax increase and spending cuts were implemented as described by the OBR report, the country would only see the national debt drop to approximately the same level as it was in 2006.

The UK’s debt problems are compounded by its aging population, which is expected to decrease economic output and raise government spending requirements in the long-term. According to data in the OBR report, the national public-sector pension bill currently stands at GBP 1.1 trillion, approximately 80 percent of the national GDP. The aging population is also placing extra pressure on the UK’s health system. The OBR recommends that the government immediately investigates health sector improvements, as increased productivity could have a significant positive effect on the country’s economic outlook.

The UK national debt is currently above 60 percent of GDP, and the OBR predicts that it could rise to 200 percent, unless action is taken now. It was recommended that the government should aim to see debts fall to 40 percent of GDP, in order to remain solvent in the long term.

Photo by Dave Dugdale