Treasury figures show that the ratio of UK taxes and social security contributions to GDP rose from 34.9% in 1996/97 to 37.4% in 2000/01, before dropping back to 35.6% last year as the economy slowed. But, with higher national insurance contributions and the economy expected to recover, the Treasury predicts that total taxes will rise to 38.2% of GDP by 2007/08.
Some commentators suggest this will be bad for economic growth, but recent research indicates that it is more complicated. It depends on which taxes go up and how the money is spent. Broadly speaking, if the focus is on taxing consumer spending more heavily, this seems to have less of an adverse effect on long-term economic growth than taxing income and profits. Similarly, public spending on education and transport tends to boost long-term growth, but higher social security benefit payments have no such effect.
Taxing consumer spending may be good for growth, but tends to be regressive as poorer people spend more of their incomes on average than the rich.
Finally, man cannot live on GDP alone: lower average income levels might be considered a price worth paying provided that the money delivers, for example, a better NHS.
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