Relying on higher taxes to meet rising public spending over the coming decades could weaken work incentives and reduce labour supply, the Treasury’s independent watchdog has warned, as it cautioned that Britain cannot rely on taxation alone to restore the public finances.
In its latest Fiscal Risks and Sustainability report, the Office for Budget Responsibility (OBR) said an ageing population, rising healthcare costs, higher state pension spending, defence commitments and the transition to net zero would place increasing pressure on public finances over the next 50 years.
While tax increases could help raise revenue, the watchdog warned that the UK’s tax burden was already projected to reach historically high levels, making further long-term rises increasingly difficult without affecting economic behaviour.
The warning is likely to resonate with employers already grappling with skills shortages, productivity challenges and efforts to increase workforce participation, as ministers continue to look for ways to grow the economy while stabilising the public finances.
Work incentives ‘could weaken’
The report examined a scenario in which personal tax thresholds rise only in line with inflation rather than earnings over the long term.
Under that scenario, around two-thirds of earners could eventually pay income tax at the higher rate of 40 percent or above by 2075-76. A full-time employee earning the National Living Wage would also become a higher-rate taxpayer at some point during the late 2060s.
The OBR said such a sustained increase in average and marginal tax rates would have “a large negative labour supply effect”, reducing the incentive for some people to work additional hours or increase their earnings and lowering the amount of revenue governments could expect to collect.
It estimated that the long-term impact could reduce labour supply by around two million average-hours-equivalent workers, although it stressed this was a stylised illustration designed to demonstrate the potential scale and direction of behavioural responses rather than a precise forecast.
The report also noted that the UK’s overall tax-to-GDP ratio is already forecast to rise from 37 percent in 2019-20 to 43 percent by 2030-31. That would move the UK from below the average for advanced economies to slightly above it, although still below the G7 average.
‘Mounting’ fiscal pressures
The OBR said demographic change would be one of the biggest drivers of future spending, with the UK population becoming significantly older over the coming decades. By 2075, almost 18 percent of the population is projected to be aged over 75, compared with under 14.5 percent in 2055, increasing demand for health and care services while reducing overall labour market participation.
Health spending alone is projected to rise from 8 percent of GDP in 2030-31 to 13 percent by 2075-76, while spending on the state pension is expected to increase from 5 percent to 9 percent of GDP. Overall primary government spending is projected to increase from 40 percent of GDP to 49 percent over the same period.
The watchdog said there were no easy solutions.
“The message is not that there is no scope to raise taxes, but that raising revenues consistently over the long term as a means of putting the public finances on a more sustainable path would entail increasing risks and worsening trade-offs.”
Workforce pressures set to grow
The report suggests employers are likely to face continuing labour market pressures as the population ages and workforce participation slows.
The OBR noted that demographic change could increase demand for occupations such as care while making it harder for employers to recruit into more physically demanding roles from a shrinking pool of younger workers. It said these changes were likely to influence employers’ investment in labour-saving technologies and the way work is organised.
The watchdog also warned that delaying action to improve the long-term sustainability of the public finances would increase the scale of the challenge facing future governments, making any eventual adjustments more costly and placing a greater burden on future generations.
William Furney is a Managing Editor at Black and White Trading Ltd based in Kingston upon Hull, UK. He is a prolific author and contributor at Workplace Wellbeing Professional, with over 127 published posts covering HR, employee engagement, and workplace wellbeing topics. His writing focuses on contemporary employment issues including pension schemes, employee health, financial struggles affecting workers, and broader workplace trends.
- William Furney
- William Furney
- William Furney
- William Furney
