A taxing problem
The UK's tax revenues are high by historical standards. They now amount to 36% of GDP, the highest level since 1950.
Yet, in comparisons among developed economies, the UK's tax take is decidedly average and well below that seen in Scandinavian countries or France or Italy.
This does not reflect a permanent political preference for lower levels of tax. In the 1960s, the UK was a high-tax country, with revenues in line with Scandinavian peers. From the 1970s onwards, most other developed economies saw their tax revenues rise, while that of the UK declined, falling substantially below western European and G7 averages by the mid-1990s.
Since then, taxes have increased roughly in sync in both the UK and other developed economies, with rises in the UK picking up pace after the pandemic. That has raised its revenues closer to the average in the developed world.
But this seemingly typical level of overall taxation sits atop what is quite an atypical personal tax system - one that places an unusually low tax burden on average workers.
OECD estimates of the 'tax wedge' - a measure of the effective personal tax rate faced by employees - bear this out. The tax wedge on average UK workers is well below that in Scandinavia or among European peers. In fact, no major developed economy raises more in overall taxes than the UK does, without taxing average workers more. While the UK tax take has risen significantly over the last 20 years, the tax wedge on average workers remains below where it was in 2007.
This is largely the consequence of policies introduced by the coalition and Conservative governments since 2010. Analysis by the Institute for Fiscal Studies shows that those governments reduced taxes for all but the highest-earning decile of households. (Tax cuts for the bottom four deciles were more than offset by benefit cuts though.)
For high earners, personal taxes rose over that period primarily through fiscal drag. Take the additional rate of income tax, for example. Since its introduction in 2010, the threshold at which it was levied remained constant at £150,000 until that was lowered to £125,140 in 2023. As a result, due to inflation and earnings growth, the proportion of full-time workers paying the additional rate has risen almost fivefold since 2010.
Continued tax rises for high earners mean their taxation looks fairly typical by international standards. The OECD's tax wedge estimates show that the UK is middle of the pack among developed nations when it comes to taxing top earners.
But their relatively low numbers mean the system is increasingly dependent on a small proportion of the workforce to fund significant chunks of revenue. Indeed, the top 10% of income taxpayers now pay almost 60% of all income tax. This highlights both a risk and limitations to raising revenue through this unusual distribution of the burden of taxation.
Decades of shielding the average worker from tax rises have meant public support for a wider distribution of the income tax burden remains low. But further taxes on a high-earning minority are likely to raise relatively small additional sums, insufficient to keep pace with current demands on public spending. Politicians seeking to grow the state will need higher, broad-based taxes to fund it.
Chart of the week
The European diesel crack spread—the premium paid for wholesale diesel over the crude oil from which it is made—has risen sharply since the onset of the war in Iran. It hit a record high of $97 per barrel around the middle of September. Having hovered around that mark for two weeks, it fell back somewhat last Friday, after the G7 announced the release of diesel reserves.
The price of crude oil has surged since the war began but European diesel prices have risen at a faster pace. This is because Europe's refineries do not produce enough diesel to meet its own demand. It is, therefore, reliant not only on crude oil supplies but also on direct imports of diesel to serve its market.
Russia used to be a major supplier to Europe. But since its invasion of Ukraine, Europe has stopped buying Russian diesel and replaced it with supplies from the US, Middle East and Asia. With Gulf exports of refined products, including diesel, at just 20% of pre-conflict levels, the price of diesel has soared.
Alongside this, Ukrainian attacks on Russian refineries have cut its diesel production by almost a third from a year earlier, prompting Moscow to ban exports. This has added to the squeeze in global supply, further pushing up prices.
Demand is also slow to adjust. Diesel remains essential for road freight, agriculture, construction and industry. So, higher prices do not quickly curb consumption.
A sharper contraction in the supply of diesel than crude, combined with sticky demand, explains why diesel prices have outpaced already-surging crude oil prices and why the crack spread has widened so dramatically.
Last Friday, the G7 agreed to release 100 million barrels of diesel and crude over four months from their strategic reserves, and the US pledged not to impose export restrictions on energy products. This news has prompted a sharp fall in diesel prices. But they remain elevated and will likely remain so, unless Gulf and Russian diesel exports recover or demand weakens
What we're looking out for this week?
This Wednesday, the US Federal Reserve will release the minutes of its September Federal Open Market Committee (FOMC) meeting, which raised interest rates. We will be looking out for any clues as to what future data releases or economic developments could prompt FOMC members to raise rates further or keep them on hold.
We'll also be looking out for the findings of an IMF study of cost-of-living crises over the last few years, to be released on Tuesday
And finally...
A man attending a fancy-dress party in Norwich, in a Batman costume, chased a thief through the city centre, including scaling a wall, and eventually helped the police recover a stolen handbag – Norwich in cape-able hands.