Ageing Population
Citibank has warned that the transition to net zero and the pressures of an aging population risk increasing the tax burden.
Analysts at BNP Paribas, a French multinational bank, said spending demands from a number of economic changes mean states will likely grow permanently larger.
As a result, Marcelo Carvalho, global head of economics, said: “I think it is very unlikely that the tax burden is going to be meaningfully reduced anywhere in the world.
“It’s more likely that it will either stay where it is or go up a bit more.”
The warning comes as debt levels have soared in many advanced economies in the wake of Covid and the Europe-wide energy crisis.
Meanwhile, Britain’s tax burden is heading towards its highest level since the Second World War, with the fiscal watchdog estimating it will amount to 37.7 per cent of GDP by 2027-2028.
Mr Carvalho said: “With Covid, our spending was increasing everywhere – in the West, in emerging markets, everywhere. Everyone’s expenses increased. now it’s coming back [down] But I don’t think it reaches pre-Covid levels.
He added: “Political dynamics [mean] It is very easy to increase expenditure but very difficult to reduce it.”
In the UK, government debt is at its highest level for more than 60 years, at almost 100 per cent of GDP, according to the Office for Budget Responsibility.
Despite all chancellors since 2010 committing to reducing debt levels, there has been a reduction in only three of the last 12 years.
Mr Carvalho said the pandemic had created demand for higher health spending “in addition to the long-term needs for investment in climate-related activities”.
Paul Hollingsworth, chief European economist at BNP Paribas, said that demographics are “one of the very large structural forces that pose serious challenges to public finances in the medium term.”
The OBR has estimated that the ratio of working-age people to retirees in the UK will fall from four to one to three to one over the next 50 years, despite high immigration.
Mr Hollingsworth said: “I think we will be left with a structurally higher level of spending than in the past, but against a backdrop of higher debt service costs than we have had before.
“This means governments have to give greater priority. They won’t be able to spend on everything and will have to cut back in some areas.
Interest rates in advanced economies have risen at the fastest pace in decades, with Britain’s borrowing costs at a 15-year high.
Mr Hollingsworth said the British economy would grow slower than the previous two years, when the impact of Covid resulted in growth rates of 8.7 per cent in 2021 and 4.1 per cent in 2022.
Mr Hollingsworth said: “I think the fundamental principles that have been set after the pandemic are to prioritize investment spending, given the challenges we face in terms of moving towards net zero and improving digitalisation.
“These are core components of many advanced economies in terms of where the money will be spent.”
The Climate Change Committee has previously suggested that the cost of moving to a low-carbon economy would be about 0.5 to 0.6 percent of GDP per year over the next decades, although this is very difficult to estimate accurately.
While Britain could see its first Labor government in almost a decade and a half next year, Mr Hollingsworth warned that high borrowing costs and weak public finances “put a lot of constraints on whoever wins”.
He said: “From the overall fiscal position, there is not much that can be done. There was very little space there anyway.
“You can change the balance of taxation and spending. This is probably what will happen with a Labor government. You would probably see higher taxes and higher spending relative to a conservative government.
“But in the context of that overall fiscal position, there are significant constraints. “Many governments will find themselves in a similar position where it really is a distributional question.”
