21 January 2023
The OECD recently published its Revenue Statistics 2022, including a comparison of OECD member countries’ tax revenues as a percentage of their gross domestic product (GDP). This tax-to-GDP ratio provides valuable insight into a government’s fiscal policy, allowing comparisons to be made between the UK and similar economies.
The UK tax-to-GDP ratio remained stable over the ten years prior to the coronavirus pandemic - the ratio was 32.0% in 2010 and 32.1% in 2020. The UK tax-to-GDP ratio was, however, higher than the OECD average in 2010 but lower than the OECD average in 2020, suggesting that whilst the UK maintained a relatively consistent policy on tax revenues during this 10-year period, this approach was not reflected more widely across the OECD, where tax revenues increased faster than GDP.
Whilst the UK ratio for 2019 of 32.2% was only marginally higher than the 2020 ratio, there was a material shift in the sources of tax revenues, largely because of the impact of the pandemic. The OECD data shows that 2020 revenues from VAT, customs and excise duties and other indirect taxes on goods and services dropped by 3.2% of total 2019 UK tax revenues (to provide 31.1% of total 2020 UK tax revenues, down from 32.8% for 2019), with revenue from property taxes also falling by 1.4% of total 2019 UK tax revenues (representing 11.6% of total 2020 UK tax revenues, down from 12.4% for 2019). Conversely, whilst taxes on income and profits and social security fell by 0.4% of total 2019 UK tax revenues, they accounted for a combined 56.8% of the total tax take for 2020 (up from 54.3% for 2019).
How does the UK compare globally in 2021?
The preliminary UK tax-to-GDP ratio for 2021 stands at 33.5%, substantially lower than other major European economies. The preliminary 2021 tax-to-GDP ratios for Germany, France and Italy were 39.5%, 45.1% and 43.3% respectively. This might suggest that the UK ratio is no longer sustainable for a mature western European economy in the current global environment. The UK tax-to-GDP ratio for 2021 is, however, higher than that of Canada (33.3%), and remains materially higher than that of the United States (26.6%).
The wide range of tax-to-GDP ratios amongst G7 countries may be seen as a reflection of the divergent approaches taken by their respective governments to public spending generally and in their utilisation of tax as a means of funding domestic economic and social investment policies. It is, however, difficult to draw substantive conclusions based on the OECD data alone.
The UK Office For Budget Responsibility (OBR) published an economic and fiscal outlook report in November 2022 that forecasts the UK tax-to-GDP ratio to peak at 37.5% in 2024-25, which would be its highest level since the end of the Second World War. The increase in the ratio is expected to be driven by key measures such as the freezing of personal income tax thresholds for the next five years from 6 April 2023, the increase in the headline rate of corporation to 25% from 1 April 2023, the increase and extension to the energy profits levy from 1 January 2023 and the new electricity generator levy from 1 January 2023. Whilst the ratio is expected to fall gradually to 37.1% by 2027-28, this would still be 4% higher than the pre-pandemic level, and the highest sustained level for seven decades.
What can businesses do now?
Businesses should continue to ensure stakeholders are aware of the ongoing upward pressure on taxes, and the potential implications for them with respect to key matters such as cashflow and effective tax rates over the coming years. It may also be appropriate to review the group’s tax strategy, alongside tax planning opportunities to maximise the benefit of any available reliefs.