Britain’s workforce could be cut by two million people if governments continue to rely on predatory taxes, the Office for Budget Responsibility has warned, in an analysis that sits squarely on the desk of prime minister-in-waiting Andy Burnham and should scare every employer in the country.
The latest report on the long-term sustainability of the financial industry concludes that repeated tax increases under Conservative and Labor governments are causing increasing damage to the economy, with each new raid bringing diminishing returns. It also warned that the crackdown on undercover tax will be difficult to continue as AI threatens to eliminate one in ten jobs.
For small business owners who have struggled with employment, the middle recovery is evident. If future governments were to permanently raise income tax rates in line with prices instead of income, two-thirds of all workers, more than 20 million people, would become high-income taxpayers within a few decades. Everyone who works full-time, even those who earn less
Under that scenario, the OBR estimates that “labor supply could fall by around two million workers” by 2075. For those people, work will no longer pay. For companies hoping to hire themselves, the labor pool is dwindling.
This machine is one that SME employers know well. Rishi Sunak suspended income tax limits in terms of capital until 2028 and Rachel Reeves extended this policy for the next ten years. OBR data shows that the freeze is already set to drag five million people into higher and higher income brackets, and the tax cuts have already put millions of Britons in higher tax brackets, among them nurses, teachers and supermarket managers. For business owners, that means workers are demanding a bigger paycheck just to stand still, at a time when payroll costs are rising anyway.
David Miles, a senior member of the OBR, said that raids may look easier politically than raising headline prices, but the costs are real. “It would be painful, because … if you keep doing that decade after decade, it’s not too far down the road until the majority of people are high-income taxpayers,” he said. That would affect “people’s willingness to work, willingness to stay in the UK [and] saving, paying taxes if income tax rates increase by that amount. So it is not a painless road to go down”.
The background is bad. The national debt is close to £3tn, around 95 per cent of GDP, and an observer has previously warned that the debt could reach almost 300 per cent of GDP within 50 years. The OBR says Burnham, or any future prime minister, could face up to £120bn worth of tax rises or spending cuts to stabilize debt at current levels. Business Matters reported last year that the watchdog is already warning of significant tax increases to come; this report suggests that the well is drying up.
The tax burden is set to reach a peacetime 38.5 per cent of GDP by the start of the next decade, and Miles has warned Britain that it is “at odds” with high-tax continental Europe. On the prospect of further increases, including proposals from Burnham’s allies on wealth taxes, he said: “It’s not that the pain is slowly increasing, it’s starting to increase quickly.”
That leaves spending. Many point to the pension triple lock, which the OBR says is making a “significant contribution” to rising spending pressures. Linking it to inflation alone would save £160bn a year in today’s money by 2075. Lord O’Neill of Gatley, who is said to be Burnham’s key economic adviser, called the lockout “bombs”. Burnham is committed to maintaining it.
Jeremy Hunt, the former chancellor, put it bluntly: “The OBR is making it clear that unless we deal with the triple lock we will end up with intolerable levels of both tax and debt.”
For the SMEs that make up the majority of Britain’s private sector workforce, the message is bleak. Whoever takes number 10, the silent tax season goes up and the weight is lifted, and the bill goes somewhere.
