British politics is trapped between two comforting fantasies. We have a fiscal problem. We can’t afford the levels of Government spending that we want within the taxes that we pay. Each side of the political divide has an easy answer to the problem.
The first belongs to the right. We are told that Britain’s fiscal problems stem from an over-generous welfare state and that the solution is to crack down on benefits. The second belongs to the left. We are told that the answer lies in taxing the rich, closing loopholes and making corporations pay their fair share.
Both stories contain an element of truth. Neither comes close to solving the problem.
The uncomfortable reality is that Britain has reached the point where there is no longer enough “other people’s money” to fund the state we have created.
The Welfare Myth
Listen to many politicians on the right and you might imagine that Britain’s public finances are being destroyed by vast numbers of unemployed people claiming benefits.
The figures tell a different story.
When most people hear “welfare” they imagine unemployment benefits. Most welfare spending is not unemployment benefits. It is pensions. Add in disability benefits and health-related support, and the vast majority of welfare expenditure goes to people who are retired, sick or disabled rather than those who are out of work.
Unemployment benefits are a relatively small part of the system. Half of Welfare spending goes on pensions, add in other pensioner benefits and OAPs receive the majority of welfare spending. A large share of the remainder goes on disability and incapacity benefits.
Universal Credit, despite dominating political debate for more than a decade, is only one component of the total.
This is why successive governments have struggled to reduce spending. The Conservatives spent much of their 14 years in Government pursuing welfare reform. Universal Credit alone cost around £15 billion to implement. The wider programme of welfare reform cost even more. The welfare system that the Conservatives created is so complex and bureaucratic that it costs £10bn a year to run DWP.
And despite this welfare spending continued to rise.
This was not because governments lacked determination. It was because they were attacking a relatively small part of the problem. Cutting benefits for unemployed working-age adults was never going to transform the public finances when the largest pressures came from an ageing population, rising disability claims and growing healthcare costs.
The arithmetic simply did not support the rhetoric. I was on the commercial board of DWP when they were developing Universal Credits. I was interviewed by the NAO who were investigating why over £1.5bn had been written off in failed IT development costs. It was clear that the Government’s plans were shaped by the welfare myths in Daily Mail headlines, not by objective reality.
The Tax the Rich Myth
The left’s favourite answer suffers from a similar problem.
Britain has achieved a remarkable feat. Tax revenues have risen to levels not seen in most of the post-war era, yet the average worker’s direct tax burden remains relatively modest by international and historical standards. This is the great paradox of British taxation
The reason why this has happened is simple. Politicians have spent decades increasing taxes on “other people”. Britain has become remarkably successful at raising revenue from people who are not average earners. Taxes on higher incomes have increased. Corporation tax has risen and fallen but remains a major source of revenue. Property taxes, capital taxes and various targeted measures have all grown in importance. This isn’t some leftie conspiracy, most of these increases in the tax take happened under the Conservatives.
The difficulty is that there are only so many other people.
The wealthy already contribute a disproportionate share of income tax receipts. Further increases may raise some additional revenue, but not enough to bridge the enormous fiscal pressures created by pensions, healthcare and social care.
Britain’s problem is not that there are too many rich people escaping tax. It is that there are not enough rich people to pay for everything.
For years I assumed there must be something wrong with Britain’s tax debate. Politicians constantly tell us that taxes are too high. Yet politicians also tell us that public services are underfunded. Both cannot be true.
Britain’s tax revenues are now close to their highest level as a share of GDP since the Second World War. Yet the taxes paid by the average worker are neither historically high nor especially high by international standards.
Both statements are true. The question is how.
The Great Tax Shift
Over the last quarter century Britain has increased the amount of tax collected by the state. But it did not do so by imposing dramatically higher taxes on average earners.
Instead it increasingly relied on taxes paid by somebody else:
- The wealthy
- Corporations
- Property owners
- Investors
- Higher-rate taxpayers
The result is a tax system that raises more money than ever whilst leaving many voters feeling they are not paying particularly high taxes.
This is not just perception. It is visible in the data.
Overall tax revenues have risen substantially.
Average workers in the UK remain relatively lightly taxed compared with many European countries.
The political genius of this arrangement is obvious. Governments discovered they could increase spending whilst reassuring most voters that somebody else would pay.
Margaret Thatcher onced claimed that the problem with socialism is that you eventually run out of other peoples money. It turns out that Thatcherism had exactly the same problem.
The Demographic Reality
The fundamental challenge facing Britain is demographic.
We are living longer. We have fewer working-age people supporting more retirees. Healthcare costs rise as populations age. Pension spending rises automatically. Social care demands increase.
These pressures are structural rather than political.
Every developed country faces them to some degree. Britain is not unique. What is unusual is our determination to pretend that somebody else can pay the bill. For years politicians have promised Scandinavian-style public services while reassuring voters that the costs can be borne by welfare claimants, tax avoiders, multinational corporations or billionaires.
It’s just not true.
The Choices Ahead
If Britain wants better public services and sustainable public finances, there are really only three options.
The first is much faster economic growth. This is the ideal solution because it makes everyone richer and generates more tax revenue without increasing tax rates. Unfortunately, governments have been promising this for decades with limited success. Brexit has reduced growth and investment. Trump has brought instability and higher oil prices. We have too few people working and too many not working.
The second is spending less. That inevitably means confronting pension spending, healthcare expectations and other politically sensitive areas rather than focusing exclusively on relatively small welfare programmes.
The third is higher taxes on ordinary voters.
That is the option politicians are least willing to discuss. Yet it is also the option that most European countries have embraced. Countries with more generous public services generally raise more revenue from average earners through income taxes, social insurance contributions and consumption taxes. I need to pay more tax, not some imaginary squillionaire.
There is no magic to it.
The bill is simply shared more broadly.
The End of Pretence
Britain’s fiscal debate has become a competition between two forms of magical thinking.
The right imagines that welfare cuts can solve a problem largely driven by pensions and demographics. The left imagines that taxing the rich can fund an ever-expanding state without affecting ordinary taxpayers.
Neither position survives serious scrutiny.
Sooner or later, Britain will have to decide whether it wants a smaller state, lower pension commitments, higher taxes on ordinary earners, or some combination of all three.
None of these options is politically attractive.
But unlike many of the alternatives, they are at least large enough to matter.
The era of funding government by taxing somebody else may not be over entirely. But after twenty-five years of shifting the burden onto a relatively narrow group of taxpayers, it is becoming increasingly difficult to pretend that somebody else will pick up the bill.
https://taxpolicy.org.uk/2026/06/05/taxing-other-people-uk