The Office for Budget Responsibility has issued a stark warning that Britain's historically high tax burden is entering "uncharted territory" and could significantly stifle economic growth. Professor David Miles, a senior member of the OBR's budget responsibility committee, stated there is "clearly a risk" that rising taxation could undermine investment, employment, and productivity.
Unprecedented Tax Levels
The tax burden, measured as government tax revenue relative to gross domestic product, is forecast to reach 36.3% in 2025/26 before climbing steadily to 38.5% by 2030/31. This represents the highest level since records began in 1948, surpassing even post-Second World War taxation levels. Professor Miles emphasized that taxes relative to GDP are on track to increase by approximately five percentage points compared to just two years ago.
Growth Forecasts Revised Downward
The OBR has already slashed its growth forecast for 2026 from 1.4% to just 1.1%, though it projects modest improvements to 1.6% in 2027 and 2028. However, Professor Miles cautioned that these projections might be overly optimistic given the unprecedented tax environment. He warned that unless implemented with exceptional care, higher average tax rates could substantially increase marginal tax rates, eroding incentives for work, saving, and corporate investment.
Marginal Tax Rate Concerns
"The pessimistic side would be that the UK already has, in certain areas, very high marginal tax rates," Professor Miles explained during a Resolution Foundation event. "Some of those will go higher and some that are lower will catch up with the high ones, potentially doing further damage and really constraining growth." He acknowledged that if policymakers could increase average tax rates without significantly raising marginal rates, the harm to growth might be minimal.
External Economic Pressures
Compounding these concerns, the OBR's forecasts were prepared before the economic shock of the Middle East conflict, which has driven up energy prices and could fuel higher inflation throughout the wider economy. Ruth Curtice, chief executive of the Resolution Foundation think tank, described Britain's immediate economic future as "highly uncertain," noting that Tuesday's forecasts "already look out of date."
Living Standards Outlook
Curtice highlighted a "lopsided" living standards picture across the parliament, with the coming year expected to bring decent improvements for poorer families as wages and benefits outpace inflation. However, she warned that a fresh energy price shock could "puncture this good news," and with wage growth set to decline, the longer-term outlook remains bleak.
Government Response
In response to the OBR's forecasts, Chancellor Rachel Reeves maintained that she has the "right economic plan," stating this approach is "even more important in a world that has become yet more uncertain in the last few days." The government faces the dual challenge of managing public finances while avoiding measures that could further dampen economic growth during this period of unprecedented taxation levels.
