When the Tax Well Runs Dry
For years, British politics has treated taxation as the answer waiting behind every difficult question. If public services struggle, raise more revenue. If welfare costs rise, find another tax or two. If debt interest tightens the fiscal space, freeze thresholds, broaden bases, or shift costs quietly from one taxpayer pocket to another. But what happens when that route is politically and economically exhausted? What happens when there is no more money to extract without damaging the very economy on which the public finances depend?
The UK is approaching that question. The Office for Budget Responsibility forecasts national account taxes rising from about 36% of GDP to 38% by the end of the forecast period, a historical high for the UK and almost six percentage points above the pre-pandemic level. Public-sector receipts are expected to reach around £1.235 trillion in 2025/26, equivalent to about £43,000 per household. These figures do not prove that taxes cannot rise further. Other advanced economies tax more. But they do suggest that the easy political fiction – that the state can keep expanding claims on national income without consequenc – is wearing thin.
Tax exhaustion does not mean every citizen is penniless or every tax rate is maximised. It means the marginal return from further taxation begins to deteriorate. People work less, invest less, move income, defer decisions – all of which creates a political unrest in which businesses invest less in skills development. capital becomes cautious and compliance becomes grudging. At that point, the problem is no longer only fiscal; it is behavioural and asssumes epidemic proportion.
The counter-argument deserves respect. A civilised society requires revenue. Ageing populations, defence needs, health pressures, and infrastructure failures do not disappear because taxpayers are tired. The OBR has identified long-term pressures from pensions, health, debt interest, climate risks and demographic change. To say “no more tax” without specifying what should give way is not seriousness; it is evasion.
But the opposite evasion is just as dangerous: pretending that every gap can be closed by “asking those with the broadest shoulders” to contribute more. Britain’s fiscal challenge is now too large for slogans which partition society as “working people” or “landlords” or “benefits claimants”. The Institute for Fiscal Studies has repeatedly warned that weak growth, constrained revenues and rising commitments leave governments with hard choices rather than painless options. The truth about our public finances is bearing down on all of us and we realise a single shock in the market (Iran) is now too much for us to bear. A deficit in political imagination signals a succession of tax increases and short-sighted social policies seeking to redistribute our wealth from the “wealthy” to the “poor”, and the low-hanging fruits of further taxation becomes the easy route for governments with few reserves of creative solutioneering available.
When the tax well runs dry, four choices remain. The first is spending restraint: not performative cuts, but a serious hierarchy of priorities. The second is reform: welfare, health delivery, procurement, planning, and public-sector productivity. The third is growth: making investment, work and enterprise more attractive, not less. The fourth is honesty: telling voters that not every desirable public good can be funded simultaneously. Each of these choices has fundamental hurdles attached. Nobody wants a programme of austeriy. A weak government can’t carry its own backbenchers through simple reforms to welfare and benefits spending. Few employers are confident that the government knows how to encourage growth. Weary voters are less willing to accept the truth of any particular argument from a political class which loses respect faster than it is earned.
None of these choices or backdrops is comfortable. All are more democratic than fiscal illusion – the lie that we’re doing okay and more tax-and-spend will fix the problem.
The danger is that governments delay this reckoning until markets or voters impose it for them. Then choices become sharper, trust collapses, and reform is carried out in panic rather than design. A mature democracy should not wait for that moment. It should be able to say plainly that taxation has limits, spending has trade-offs, and prosperity cannot be redistributed before it is created through tangible and sustained economic growth.
The question is not whether the state should be smaller or larger. It is whether Britain can recover the discipline to match promises with means. When there is no more money left to extract, politics must rediscover something harder than taxation: choice.
