30 July 2010
Real cost of taxes now more than half UK GDP
BRITAIN’s high tax burden under Chancellor Gordon Brown is costing the UK economy an extra £138bn (€200, $247bn) a year in lost wealth by crushing incentives to work, trade and invest, according to a report this weekend.
Research, by Fred Harrison and published by the Institute of Economic Affairs, shows the indirect cost of the tax system to be far greater than usually realised – about 12% of national wealth. It will deal Brown a further blow at a time when he is already under fire for his role in Labour’s crushing defeat in the Dunfermline and West Fife by-election last week.
If added to the 42.4% of GDP already accounted for by the state, according to the OECD’s measure of the tax burden, this takes the total cost of government – even before excluding the massive cost of red tape – to significantly more than half of national income.
Harrison’s sums are based on the theory of the “deadweight loss” of taxation accepted by all mainstream economists. But Brown’s Treasury has refused to produce its own estimate of the size of the problem. Harrison, an economist who also runs the Land Research Trust, said: “Remedial action is urgently needed. The Treasury fails to measure the impact of its policies on the economy.”
The news comes as the Bank of England’s monetary policy committee prepares to release its quarterly inflation report on Wednesday.
A poll of economists by research house Ideaglobal this weekend reveals 62% of respondents think the report will be more dovish than November’s, against 38% who said it would be similar; 88% believe inflation will breach its 2% target this year, whereas only 12% think it will not.
The report is likely to be a little more negative that that of last November, according to the bank HSBC. At the time, gross domestic product growth (GDP) was expected to be 2.8% by the fourth quarter of 2006 and 3.8% by the end of 2007.
John Butler, UK economist at HSBC, said: “Over the past three months, they are likely to have been encouraged by the updates on the consumer but less on investment and exports. We expect the MPC to add a negative skew to their growth forecast in 2006.
“We expect the MPC to express fewer doubts over the reliability of the GDP data during 2005. Overall we expect the tone of the report to be more cautious and slightly more dovish than in November."
By Allister Heath, Deputy Editor, The Business.
To by or download a copy of The Wheels of Fortune by Fred Harrison click the title.
The story was also reported by Forbes under the headline UK's high tax burden hits economy - Institute of Economic Affairs .
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