Britain needs to pay higher taxes

A recent column by William Keegan in The Observer about why we shouldn’t call taxation the “tax burden” got me thinking about the Autumn Statement and the seemingly endless demands for tax cuts from the right, even when we all know the government has no money to spare for essentials, let alone tax cuts.

They all seemed obsessed with the idea that we are far too highly taxed, and the UK population has become dependent on “handouts”, as if the welfare state hasn’t been salami-sliced to death already. The government isn’t running out of money because of benefit cheats. It has failed to invest and grow the economy to provide the money it needs.

So why don’t we turn the world on its head for once, and instead of looking at what the state can or can’t afford with current levels of taxation look at what the UK would look like if we just admitted the truth and started taxing ourselves as our neighbours do?

In the EU the average percentage of GDP that the government takes in taxation and other fees is 41.7%, and in the eurozone it is slightly higher at 42.2%. In the two most comparable countries to the UK, France and Germany it is 47% and 42.4% respectively.

So it seems fair to say that on average most of our economic rivals think they need to take 42% of GDP to pay for the things that the state has to do. Defence, health spending, infrastructure, education and all the rest. In the UK we think we can do the same or better by taking just 37% of GDP in taxation – and that is pretty much a post-war high.

Remember this is the level at which the right wing Tufton Street economists wring their hands and scream for tax cuts for millionaires as the only way to get the economy growing. Having said that, it is difficult to think of a level at which they have been happy that taxation is fair, equitable and affordable. That raises the question: why do we listen to them if they always demand the same thing regardless?

So instead let’s look at what the UK might be like if we raised taxation to 42% of GDP each year and every year. At the moment taxation at 37% brings in £950 billion a year. Increasing it to 42% should bring in around an extra £130 billion a year – a 14% increase in tax revenue for the government to spend. With that kind of money you could increase health spending by 50% and still have £50 billion left over – or you could pay for HS2 in well under a year.

Defence spending could treble, with change left over to pay for a 10% increase in education spending. Or, pensions could double overnight.
The list goes on and on, you would be mad to throw all the new money available at defence or pensions or anything else – but the point is that even modest increases would, over many years, raise the standard of government services immeasurably.

Why do you think that France and Spain have high speed rail networks that work? Why does Germany have far more hospital beds, doctors and medical scanners than we do? Why does the UK have one of the worst state pensions in Europe? Why are schools collapsing and the legal system grinding to a halt? We do not spend enough money on them.

The obvious place to start spending this windfall would be infrastructure. The UK has massively underspent on this for decades, as the Treasury and ministers always seem to find that they can save money today by cancelling investment for the future.

This is short-sighted and self-defeating, because one of the biggest drivers of growth is infrastructure and investment. Kick starting improvements on growth and productivity are essential for the UK. If growth and productivity had maintained their pre-2008 trend, everyone in the UK would, on average, be 31% better off than they are now.

That lack of investment has been a serious long-term problem for the UK. The Institute for Public Policy Research has found that public sector investment is not just low, but that it has never been above average for the OECD or the G7. If the public sector had invested at the G7 average during the last 16 years, the British government would have invested an additional £208.4 billion.

You could build an awful lot of motorways, high speed rail links, and research labs for that money. Green technology would have made leaps and bounds, as would internet provision, water standards and training facilities.
Productivity would have risen faster, repaying the cost of the investment.
This gives the lie to those who say that low taxes are necessary to encourage growth. There is just no evidence that low taxes do any such thing. Lots of economies that tax far more than even the EU average have healthy growth rates.

As for those who say people should be allowed to spend their own money on what they want to, and it is not the state’s job to stop them – well, if the state stops spending money, you end up having to pay for your own health care and then you find you live in an economy with bad education and training standards, collapsing schools and hospitals and endless defence cuts. The argument is not about whether there should be any state spending at all but about how much is needed to create the society we all want to live in. The evidence is clear, it is more than we spend at the moment, not less.

Of course, not all of these improvements will happen overnight, even if we immediately raised taxation to “average” levels. Countries like France and Germany have been spending and investing more than the UK for at least the last 40 years. If you want a better NHS, better railways, better roads, better schools and better pensions you will have to wait a while, but the cumulative improvement in quality of life, quality of services and the quality of facilities would start almost at once.

If you are fed up with returning from holiday and declaring to all and sundry, “Why does nothing work here when everything works so well abroad?” The answer is: you get what you pay for.