3.1. Tax systems ranking
The most important place for economic sustainable growth and investment decision-making occupies taxation system. For its analysis and ranking, annual data from the tax systems ranking (Paying Taxes) of 190 countries of the world from 2004 to 2018 were used. This ranking was conducted by the World Bank Group as part of the Doing business project and by PricewaterhouseCoopers Company (PwC) (Table 1).
The purpose of the ranking is to determine the tax burden, ease of calculation and payment of taxes. The following indicators were used: Total tax burden as Total Tax and Contribution Rate (TTCR). TTCR includes Profit tax TTCR, Labour tax TTCR, Other taxes TTCR. Until 2018, the Total tax rate (TTR) indicator was assessed. Labour costs for tax accounting are hours required to fulfill the calculation requirements and prepare reports on the main types of taxes. Amount of tax payments.
Table 1
Administrative burden of paying taxes and contributions by regions and countries, unless otherwise indicated %, global ranking, 2018
Regions/Unions/States
|
Global Ranking 2018
|
TTCR
|
Profit TTCR taxes, %
|
Labour TTCR taxes, %
|
Other TTCR taxes, %
|
South America
|
-
|
53.3
|
17.0
|
16.9
|
19.4
|
Africa
|
-
|
47.3
|
18.2
|
15.2
|
13.9
|
EU average
|
-
|
38.9
|
12.0
|
25.3
|
1.7
|
North America
|
-
|
38.7
|
18.6
|
16.6
|
3.6
|
Asia Pacific
|
-
|
36.6
|
17.2
|
11.5
|
7.9
|
Central Asia & Eastern Europe
|
-
|
33.0
|
12.3
|
17.8
|
3.0
|
World average
|
-
|
40.5
|
16.1
|
16.3
|
8.1
|
Bahrain
|
1
|
13.8
|
0.0
|
13.5
|
0.3
|
Hong Kong SAR China
|
2
|
21.9
|
16.5
|
5.3
|
0.1
|
Qatar
|
3
|
11.3
|
0.0
|
11.3
|
0.0
|
Ireland
|
4
|
26.1
|
12.4
|
12.4
|
1.4
|
Kuwait
|
6
|
13.0
|
0.0
|
13.0
|
0.0
|
Singapore
|
7
|
21.0
|
2.1
|
17.8
|
1.1
|
Denmark
|
8
|
23.8
|
17.1
|
4.0
|
2.8
|
Finland
|
10
|
36.6
|
12.1
|
23.0
|
1.5
|
Oman
|
11
|
27.4
|
14.4
|
13.0
|
0.0
|
Israel
|
13
|
25.3
|
18.0
|
5.8
|
1.5
|
Canada
|
19
|
24.5
|
8.0
|
12.7
|
3.8
|
Switzerland
|
20
|
28.8
|
9.3
|
17.7
|
1.8
|
Korea Rep.
|
21
|
33.2
|
18.2
|
13.7
|
1.4
|
Netherland
|
22
|
41.2
|
20.4
|
20.5
|
0.3
|
Luxemburg
|
23
|
20.4
|
4.2
|
15.4
|
0.8
|
USA
|
25
|
36.6
|
20.7
|
9.8
|
6.1
|
UK
2016
2018
|
23
27
|
30.7
30.6
|
18.1
16.6
|
10.9
12.0
|
1.7
2.0
|
Australia
|
28
|
47.4
|
26.1
|
21.0
|
0.3
|
Cyprus
|
29
|
22.4
|
8.3
|
13.0
|
1.1
|
UAE
|
30
|
15.9
|
0.0
|
14.1
|
1.8
|
Sweden
|
31
|
49.1
|
13.1
|
35.4
|
0.6
|
Norway
|
34
|
36.2
|
20.0
|
15.9
|
0.3
|
Spain
|
35
|
47
|
10.6
|
35.8
|
0.7
|
Taiwan China
|
39
|
36.8
|
14.7
|
18.7
|
3.4
|
Austria
|
44
|
51.4
|
17.1
|
33.7
|
0.6
|
Germany
|
46
|
48.8
|
23.2
|
21.5
|
4.1
|
Japan
|
51
|
46.7
|
23.9
|
18.6
|
4.2
|
RSA
|
54
|
29.2
|
21.8
|
4.0
|
3.4
|
Russian Federation
|
58
|
46.2
|
7.4
|
36.6
|
2.2
|
France
|
61
|
60.7
|
0.2
|
50.0
|
10.5
|
Thailand
|
68
|
29.5
|
22.2
|
5.4
|
1.9
|
Malta
|
78
|
44
|
32.3
|
11.1
|
0.5
|
Malaysia
|
80
|
38.7
|
19.6
|
16.7
|
2.5
|
Indonesia
|
81
|
30.1
|
18.1
|
11.6
|
0.4
|
China
|
105
|
59.2
|
6.3
|
46.2
|
6.8
|
Vietnam
|
109
|
37.6
|
13.2
|
24.3
|
0.1
|
India
|
115
|
49.7
|
21.6
|
20.2
|
7.9
|
Italy
|
128
|
59.1
|
14.6
|
42.9
|
1.6
|
Brazil
|
184
|
65.1
|
22.4
|
39.4
|
3.3
|
Tax burden of enterprises by regions and countries of the world, unless otherwise indicated %, global ranking, 2018. This topic recorded the taxes and mandatory contributions that a medium-size company must have paid or withheld in a given year, as well as the administrative burden of paying taxes and contributions.
Compiled by: World Bank Group. Paying Taxes 2018–2020 data; PwC Paying Taxes 2018–2020.
The tax system is traditionally assessed in terms of two functions: fiscal and stimulating economic development, investment, and aggregate supply growth (AS). The economic policy of the state for each stage, cycle of economic development, for macroeconomic tasks and goals selects a specific combination between taxation of profits, labour, other taxes and fees, and ultimately determines the total tax burden on business and labour. The tax system and policy are a subtle instrument for accelerating or restraining economic growth, stimulating national capital and/or foreign investment in a country. We will pay special attention to the UK’s indicators in the global tax burden map.
The TTCR indicator in the United Kingdom (hereinafter referred to as UK) was in the range of 34.7 and 30.0% during the WB and PwC analysis period 2004–2018. The UK ranks 27th in the world in terms of total tax burden (TTCR), ahead of the EU, North America, and behind the USA, small economies of Europe and the Middle East (Tables 1, 2).
Taxation of labour in the total tax burden in the UK is one of the lowest in the world with an example of flexible management of this tax: in 2004–2008 the figure was in the range of 11.4–11.0%, in 2009 (as an anti-crisis instrument) it was reduced to 10.8%, in the post-crisis period (2010–2014) it was increased from 11.0 to 11.2%. From 2015 until the COVID-19 pandemic, Her Majesty's Revenue and Customs (HMRC) has taken a soft and progressive path of liberalization – 10.8–10.9%.
Table 2
United Kingdom. The Paying Taxes score, 2004–2018
Indicator / Year
|
2018
|
2017
|
2016
|
2015
|
2014
|
2013
|
2012
|
2011
|
2010
|
2009
|
2008
|
2007
|
2006
|
2005
|
2004
|
The Paying Taxes score
|
86.2
|
87.1
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total Tax & Contribution Rate (%)
|
30.6
|
30.0
|
30.7
|
30.9
|
32.0
|
33.5
|
34.7
|
35.0
|
36.2
|
36.1
|
34.9
|
34.2
|
34.6
|
34.6
|
34.7
|
Profit TTCR
|
16.6
|
17.3
|
18.1
|
18.3
|
19.2
|
20.6
|
21.7
|
22.4
|
23.6
|
23.6
|
22.3
|
21.5
|
21.8
|
21.8
|
21.8
|
Labour TTCR
|
12.0
|
10.8
|
10.9
|
10.9
|
11.2
|
11.3
|
11.4
|
10.9
|
11.0
|
10.8
|
11.0
|
11.2
|
11.3
|
11.3
|
11.4
|
Other taxes TTCR
|
2.0
|
1.9
|
1.7
|
1.6
|
1.6
|
1.6
|
1.5
|
1.7
|
1.6
|
1.7
|
1.6
|
1.5
|
1.5
|
1.5
|
1.5
|
Time to comply (hours)
|
114
|
105
|
105
|
105
|
105
|
105
|
105
|
105
|
105
|
105
|
105
|
100
|
100
|
100
|
100
|
Corporate income tax time
|
32
|
32
|
32
|
32
|
32
|
32
|
32
|
35
|
30
|
30
|
30
|
30
|
30
|
30
|
30
|
Labour tax time
|
57
|
48
|
48
|
48
|
48
|
48
|
48
|
45
|
45
|
45
|
45
|
45
|
45
|
45
|
45
|
Consumption tax time
|
25
|
25
|
25
|
25
|
25
|
25
|
25
|
25
|
30
|
30
|
30
|
25
|
25
|
25
|
25
|
Number of payments
|
9.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
8.0
|
Profit tax payments
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
Labour tax payments
|
2.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
1.0
|
Other taxes payments
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
6.0
|
Post-filing index
|
71.0
|
71.0
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Rank (out of 189)
|
27
|
232
|
233
|
144/105
|
156
|
167
|
148
|
169
|
1810
|
1611
|
1612
|
1613
|
1214
|
-
|
-
|
Sources: World Bank Group (2020). Paying Taxes 2018–2020 data; PwC (2020). Paying Taxes 2018–2020.
2 WB DB18. Data in Doing Business (2018).
3 WB Paying Taxes (2018).
4 WB DB17 Paying Taxes 2004–2015. Overall ranking.
5 WB Doing Business (2017) 2004–2015. Overall ranking.
6 WB DB16 Paying Taxes 2004–2014. P. 8.
7 WB DB15 Paying Taxes 2015. P. 8.
8 WB DB14 Paying Taxes 2013. P. 9.
9 WB DB13 Paying Taxes (2013). P. 2.
10 WB DB12 Paying Taxes (2012).
11 WB DB11 Paying Taxes 2009–2010. P. 9.
12 WB DB10 Paying Taxes 2008–2009. P. 12.
13 WB DB09 Paying Taxes (2009).
14 WB DB08 Paying Taxes (2008).
The UK has created a competitive tax payment system: the total time in 2018 was 114 hours, including time to pay CIT – 32 hours, Labour tax – 57. Consumption tax – 25 hours. For comparison, respectively: on average in the world (234 hours, 59, 85, 90 hours), Japan (129, 38, 71, 20), Germany (218, 41, 134. 43), USA (175, 87, 55, 33), China (138, 40, 52, 46), Singapore (64, 24, 10, 30), Switzerland (63, 15, 40, 8) (PwC Time to comply, 2020).
3.2. Directions of UK tax reform in the 21st century.
Fiscal policy and tax reforms of all countries in the 21st century, within its framework, were, in some way, determined by external circumstances: the beginning of transition of economies to a new technological mode of production, the global crisis (2008–2009), the SARS Covid-19 pandemic (2019–2020). The UK case is a clear confirmation of this.
In the 2010 budget, the UK government initiated “The Corporate Tax Road Map” in two stages of tax reform (the 2nd from 2016) with a horizon until 2020, aimed to increase the global competitiveness and investment attractiveness of the national (HM Treasury. Corporate Tax Reform (2010). It was based on the following principles: reduce rates while maintaining the tax base (a low corporate tax rate with fewer benefits and allowances will provide the best incentive to invest in business with the least distortion); maintain stability of the tax system (without unnecessary changes); compliance with the modern business practices in the context of globalization and technological change; maintain a level playing field for taxpayers (the tax system should be fair for all corporate tax payers, without distorting commercial decisions) (HM Treasury. Corporate Tax Reform (2010). Р.11).
Implementing these principles, HM Treasury carried out the following reform: Corporate Income Tax (CIT) rate was reduced from 28 to 20%; rate on income from patented intellectual property was reduced by 10% (Patent Box); Annual Investment Allowance (AIA) was introduced in the form of a deduction from taxable profit in the amount of actual costs for the purchase of machinery and equipment according to a certain list and cost; list of tax credits for R&D has been expanded; provision of tax preferences to employers on insurance premiums in the event of an increase in employment was announced. The decisions were reflected in the budget for 2010–2011 and until 2014–2015.
In order to reduce the budget deficit (from 4 January 2011), the 2010 budget increased the basic VAT rate to 20%, which would add £2.8 billion to the 2010–2011 budget (respectively, + 12,100 in 2011–2012; +12,500 in 2012–2013; +12,950 in 2013–2014; + £13,450 billion in 2014–2015) and Insurance Premium Tax: increase standard rate to 6% and higher rate to 20%.
For the growth of enterprises, Corporate Tax was gradually reduced (to 27% in 2011–2012, 26% in 2012–2013, 25% in 2013–2014, 24% in 2014–2015), that would bring business +£6.5 billion by 2014–2015. These and other tax measures increased the current budget expenditure on capital from £5.2 billion (2010–2011) to £31.9bln (2014–2015). At the same time, the forecast plan for total policy budget decisions was positive from + 8.1bln (2010–2011) to + £40.2 billion (2014–2015) (HM Treasury Budget 2010).
Thus, the 2010 tax reform carried out for fiscal consolidation (a strategy to minimize the budget deficit). We found that the underlying principle of HM Treasury in the 2010 reform (“cutting rates while maintaining the tax base”) was confirmed by IMF research: “Base expansion under fiscal consolidation leads to lower output and lower employment compared with the era of rising rates.” In particular, unemployment rises less following a tax base shock, expanding the income tax base reduces productivity, an increase in the CIT rate has a larger impact on output, and an increase in the VAT rate is related to a large and persistent decline in output (Dabla-Norris, E., Lima, F. 2018). It is important to emphasize that the positive effect of “lowering rates while maintaining the tax base” was stated by A. Greenspan (2005) analyzing the US tax reforms of the 80s of the 20th century, when not only the crisis of 1980–1982 was overcome, but also transition from Keynesian stimulation of AD with the help of government orders to AS was made. In particular, it was made by reducing the tax burden on business.
The UK government included the following main results of the 2010 reform: post-crisis economic recovery, growth in domestic investment by 26% (1Q 2010 to 1Q 2016), a record amount of FDI projects in 2014–2015 created almost 85,000 new jobs, an increase in the number of small businesses by 100,000 over the period 2014–2015 (HM Treasury. Business tax road map (2016).
Expected GDP growth effect based on tax reform 2010. In 2013, the government published an analysis, which models the long-term economic impact of the corporate tax cut. Over the long term, the reform could lead to an increase in GDP of 0.8–1.3% (£15 billion to £24 billion) excluding adjusting for FDI (HM Treasury. Business tax road map 2016. P.18).
At the same time, households, businesses and the government were not satisfied with the qualitative macroeconomic effects. In particular, the output index has been preserved (including manufacturing, production, services); unemployment remained above the 5% threshold; monthly GDP index (base = 2019) was in the range of 85–93; general gov. gross deficit (% of GDP) was more than 100%; Government budget deficit – more than 5–10%.
The 2016 Budget and Tax Reform, while maintaining the principles of the 2010 reform, took the path of modernizing the tax regime in the direction of reducing tax rates to stimulate economic growth and productivity, creating incentives for long-term investment and innovation, including support for small businesses.
By reviewing business rates, the government reduced the burden on taxpayers by £6.7 billion during 2016–2020. The reform followed three strategic directions: reducing taxes and commercial tariffs on small businesses, reducing the basic corporate tax rate and granting local authorities the right to administer small business taxation.
Small business. The budget focused on the 900000 smallest businesses. They were exempt from tax and got 100% relief on commercial rates for properties valued at £12,000-£15,000.
From April 2020, it was planned to reduce taxes for all rate-paying businesses by changing the annual indexation of RPI business rates in order to match the main measure of inflation. This was supposed to provide business with £370 million only in 2020–2021. After 2020, the government planned to transfer the strategy of annual tax cuts to indirect taxes.
Expansion of tax administration. The Government has modernized the business rates administration system to continually reassess rates, giving the right to standardize and benefit business rates invoices linked to HMRC digital tax invoices to local authorities across the UK.
Corporate tax. The government assumed that its high rates distorted investment decisions and undermined economic growth. Therefore, already in the 2010 reform, the Treasury reduced the basic corporate tax rate from 28–20%, reduced the small profit tax rate to 20% and combined these two rates. In the 2016 budget, the government continued strategic line of steadily and further reducing CIT to 19% in 2017 and 17–18% in 2020. Note that the UK has the lowest corporate tax rate in the G7 and G20, which, according to government plans, should have brought to domestic business £15 billion by 2020–2021, strengthen the country’s position as an investment-attractive world’s center.
Budget 2020 is the first post-Brexit budget. Therefore, it intended to demonstrate a broad, integrated approach to public finance and ensure qualitative changes in macro and microeconomics. Its peculiarity was the solution of short-term and long-term tasks and problems. At the same time, the budget was hit by an external force majeure - the SARS Covid 19 pandemic and the beginning of solving civilizational problems - the transition to new technologies, decarbonization (by 2050) and orientation towards future clean markets.
The 2020 budget did not change tax rates (the main CIT remained at 18%, although the 2016 budget did not rule out a move to 17%) and focused on spending and tax breaks. We rank budget expenditures by major items: social protection £285 billion, health – 178, education – 116, debt interest – 56, defense – 55, transport – 44, personal social services – 36, industry, agriculture and employment – £30 billion (HM Treasury. BUDGET 2020. – P.7).
In detailing the budgetary spending to combat Covid-19, £12 billion was allocated to support public services, individuals and businesses (sick benefits, SME loan programs (£1 billion), grants and tax deferment assistance (£2.2 billion). Overall, the National Health Service (NHS) received an additional £34 billion from the 2024 budget.
The government, having identified the main targets for a technological leap and growth, focused on solving the main starting problems: equalizing the levels of development of UK regions in terms of labour productivity, infrastructure, living standards, education, R&D. A national infrastructure development strategy was adopted, opening up funding for the construction of railways (£27 billion) and rural roads, communications, flood protection, power grids, and housing construction. A special program included reconstruction of colleges and the teaching of engineering and mathematics. Investing in the future, the government has increased public investment in R&D to £22 billion, with a plan to bring this spending to 0.8% of GDP. Overall, the difficult task of raising the National Living Wage (NLW) to 2/3 of the average wage of £10.5/per hour in 2024 was set.
The financial implications of the budgetary decisions summarized in Table 3.
Table 3
Budget 2020 policy decisions (million)*
|
2019-20
|
2020-21
|
2021-22
|
2022-23
|
2023–2024
|
2024–2025
|
Total spending policy decisions
|
-355
|
-19.255
|
40.185
|
-45.640
|
-48.780
|
-49.440
|
Total tax policy decisions
|
+ 960
|
+ 1.355
|
+ 3.755
|
+ 7.110
|
+ 7.625
|
+ 7.520
|
Total policy decisions
|
+ 605
|
-17.900
|
-36.430
|
-38.530
|
-41.150
|
-41.920
|
*Sources: HM Treasury. BUDGET 2020. – P.7.
The macroeconomic backdrop for the UK post-Brexit economic policy and Budget 2020 was grim. According to the Office for National Statistics and Office for Budget Responsibility, the GDP growth rate was the lowest for the period 2010–2019–1.1%; labour productivity (GDP per hour, USD) has systematically been 20% lower than the USA, Germany, and France since 1980 and amounted to 73% in 2018. Within the UK, there is a significant gap in labour productivity between London, South East, North West, Scotland and the rest of the country. The efforts of HM Treasury from 1989–2019 to consistently reduce the 10th Treasury yields, % from 12–1% did not trigger the growth mechanism of GDP, but increased public sector net debt 2000 to 2019 (% GDP) from 28–80% and made the budget systematically deficit, including the 2020 budget of £55 billion (HM Treasury. BUDGET 2020. – PP.14–18, 20–22).
Fiscal policy and UK parliamentary in 2007–2023.
Over the past 25 years, the Labour Party (LP) formed the cabinet of ministers for 13 years from 1997 to 2010, the Conservative Party also for 13 years from 2010 to 2023. LP in fiscal policy pursued the Third Way concept (A. Blair’s idea of a compromise between social justice and mixed economy), which is correspondingly reflected in budget expenditure items with high values for social protection, health, education, transport, personal social services, industry, agriculture and employment. The practice of shocking the budget expenditure side has emerged. This shock received new features in connection with the anti-crisis policy of the Labour cabinet of A. Blair during and after the global crisis of 2008–2009, which expressed in broad budgetary support for the banking system, business and public demand (more about the crisis and the joint anti-crisis policy of the G20 in Shavshukov, Zhuravleva (2015).
For the last 13 years, the Conservative Party determined economic policy, which offered tax shocks to the UK economy with reforms in 2010 and 2016, and budget shocks in 2020–2021 due to the socio-economic relief of the SARS Covid-19 pandemic. Therefore, the Cabinet of Ministers of Mary Elisabeth (Liz) Truss, despite the 50-day stay in the history of 10 Downing St. (6.09.2022-25.10.2022), consistently pursued conservative fiscal and monetary policies. This was an extremely unsuccessful attempt to speed up the economy through an untimely reduction in the tax burden in the face of rising budget expenditures. Kwasi Kwarteng The Chancellor of the Exchequer delivered a Ministerial Statement entitled "The Growth Plan" (mini-budget) to the House of Commons (not being an official budget statement) (Kwarteng, 2022) declared a refusal on behalf of the government from an increase in CIT from 19 to 25%, from a maximum personal income tax rate of 45% on income over £150,000 and a reduction in the basic rate of income tax from 20 to 19%. The cost of the plan to the state budget was £45 billion. The second blow to the budget was the plan to subsidize energy consumption by £150 billion.
The disposal of budget revenues and the increase in its expenses with a horizon of 2027–2028 were planned in the context of the current deficit: in 2020–14.5% of GDP, 2021–6%. To execute the budget, the Bank of England was forced (against the backdrop of inflation of 11.1% in October 2022 – the highest since 1983) to increase the key rate from 1.75–2.25%, and the Treasury – the yield on 10Y T-bills at 1.33 times from 3.088% (09/07/2022) to 4.123% (10/5/2022). Markets did not believe in the reliability of the financial system: the GBP exchange rate according to the BIS REER index (2022, quarterly, broad (64 economies) collapsed from 104.95 (Q1) to 103.71 (Q2) and 101.63 (Q3), i.e. by 3.2% for 2022 (BIS REER GBP 2022).
The actions of the E. Truss government increased the imbalance of monetary and fiscal policies, led to the threat of recession, and caused market mistrust. As a result, the new Chancellor of the Exchequer of the new cabinet, Jeremy Hunt, disavowed the decisions of the previous government (The Chancellor fiscal statement, 2022; The Chancellor Autumn statement budget 2022).
What are the methodological mistakes of the government of E. Truss and of the plan for exiting the post-crisis situation of Prime Minister Rishi Sunak – Chancellor J. Hunt? One can agree with the analysis of the logical chain of reasons for the growth of inflation and government debt: rising energy prices, supply-side inflation, the Central Bank increasing interest rates and yields on government bonds. Containing inflation through a simultaneous increase in the cost of money (up to 5.25% in September 2023), yields on government securities and record payments of %% on the government debt of £120.4 billion (the cost of fighting Covid-19 and compensation for rising energy prices) – increases the budget deficit. Moreover, government orders work both to increase the price trend and to increase public debt.
Therefore, a reduction in budget revenues by reducing the tax burden on business and labour is excluded, and budget expenditure items aimed at accelerating the transition to a new technological structure and solving civilizational problems can be temporarily sequestered. Despite the Tories’ ambitious plans to be “leaders in the environmentally friendly markets of the future”, it is probably necessary to shift the timing of projects on a global and national scale. In particular, investments provided for in the 2020 budget to reduce energy consumption by 15% by 2030, decarbonize the economy (ensuring “net zero carbon dioxide emissions by 2050”, a ban on sale of gasoline and diesel cars after 20302), investments in English strategic rail and highways (£27 billion until 2027) (HM Treasury. BUDGET 2020). Budget 2020 envisioned that overall departmental spending would grow twice as fast as the economy and public sector net investment in real terms would be three times above the average of the past 40 years. In total, gross capital expenditure was envisaged at £640 billion.
The budget concept outlined above, in the context of expensive debt servicing in the amount of £56 billion, which is 6% of the 2020 budget expenditures, exceeds not only such expenditure items as industry, agriculture and employment (£30 billion), personal social services (£36 billion), public order and safety (£38 billion), housing & environment (£32 billion), transport (£44 billion), but also very important income items - business rates (£32 billion), council tax (£38 billion).
The UK, ranking 27th in total tax burden (TTCR) and 6th in Doing business, maintains global competitiveness and investment attractiveness. The alternative to an increase in government debt to GDP (in 2023 £2.5 trillion, or 98.9% of GDP) of more than 100% poses the threat of default, a downgrade of the sovereign rating from the AAA rating that investors are accustomed to, an increase in borrowing costs, currency devaluation, and a decrease in living standards. All Tory governments have plans for sustainable economic development, which includes fiscal sustainability. Apparently, methodologically, new threshold values are needed as guidelines for new conditions for the main macroeconomic indicators: GDP growth rates, GDP/per capita, inflation, employment, public debt (the budget rule for the debt-to-GDP ratio of no more than 40-50-60%%), quality of life, tax burden on business and labour.
The modern Conservative government is limited by the need, on the one hand, to invest in the future (reducing energy consumption, investing in people and infrastructure, green and digital economy, R&D) and, on the other hand, high social obligations against the backdrop of an aging population and annual debt servicing in the amount of £7–9 billion.
The 2023 spring budget, excluding the 2022 tax and budget shocks, was moderate and balanced3. It reflects three priorities: halving inflation, reducing debt and ensuring economic growth. Tactical instruments were used: increasing interest rates of the Bank of England (up to 5.25% in September 2023), freezing energy prices, fuel duties, equalizing tariffs for comparable customers, etc., for which £94 billion was allocated in 2023-24 (which equivalent to £3,300 per household). Strategically, the government has committed £20 billion to support the construction of new nuclear power stations, carbon capture and storage. Support for long-term economic growth, education, leveling the level of regional development, and the creation of 4 development clusters was also announced, but without significant spending. As a result, Budget 2023 (Table 4), starting from 2023-24, reduces annual spending by £8.5 billion and the tax burden from £13.3 billion (in 2023-24) to £1.87 billion (2027–2028).
Table 4
Spring Budget 2023 policy decisions (£ million)
|
2022-23
|
2023-24
|
2024-25
|
2025-26
|
2026-27
|
2027-28
|
Total policy decisions
|
-1.335
|
-21.850
|
-21.405
|
-21.385
|
-14.910
|
-10.420
|
Total spending policy decisions
|
+ 10
|
-8.545
|
-7.555
|
-8.035
|
-8.590
|
-8.550
|
Total tax policy decisions
|
-1.340
|
-13.305
|
-13.845
|
-13.350
|
-6.315
|
-1.87
|
Sources: HM Treasury SPRING BUDGET 2023 March 2023. p. 80.
3.3. Impact of the tax burden on macroeconomic performance (2004–2018) (UK case)
This section describes the results of the research based on constructing a regression model. Purpose of this research was to identify dependence between the level of tax burden (TTCR) and a number of macroeconomic indicators characterizing the UK development in 2004–2018. These indicators were not only a macroeconomic background, but also a limitation for economic policy.
The following macroeconomic indicators for which there is a hypothesis about the dependence on the TTCR level, selected:
-
Gross domestic product (GDP) – based on the definition that this is the total monetary value of all goods and services produced in the country during the year, the level of taxes is reflected in their final value; for the purposes of this study, GDP was used at constant prices, in US dollars.
-
Unemployment rate – fiscal policy is one of the mechanisms by which government influences the unemployment rate. Reducing the tax burden on businesses stimulates business activity and increases employment. Increasing consumption taxes tends to reduce production and employment. Reducing labour tax rates encourages businesses to increase employment. Sectoral tax regulation may cause an increase in business activity and employment in these sectors of the economy.
-
Consumer price inflation (CPI) – one of the economic indicators reflecting the dynamics of inflation processes in course of consumption of goods and services, the cost of which includes some taxes.
-
Labour productivity – an increase in the level of tax burden reduces the opportunities for growth in labour productivity (as the ratio of value added per unit of time, VA/t), in particular through the level of production efficiency and production volumes; labour productivity per worker used to estimate the impact of TTCR on VA/t.
-
Central government debt – an indicator of the governmental borrowings’ volume carried out through the issue of securities by the Treasury, syndicated loans. The government's debt affects the size of the budget deficit (Gov.Debt/GDP, %), is serviced (Debt interest) and regulated by the budget revenues. Fiscal policy (tax increases, waiver of preferences) and reductions in budget expenditures (for the industry, agriculture and employment; personal social services; public order and safety; housing & environment; transport; education; R&D) serve the budget deficit, affect the sovereign's rating, and worsen the terms & conditions of deals for national businesses.
-
Quality of Life Index (Numbeo, 2018) is an assessment of the overall quality of life in a country that takes into account various factors that influence quality of life, including purchasing power, pollution levels, housing affordability, cost of living, safety, quality of healthcare, travel time and climate conditions. The index is calculated using an empirical formula that assigns weights to each factor based on its importance, with a higher index value indicating better quality of life. A number of factors taken into account in this index depend on the size of the tax burden. (Index data is available starting from 2012).
-
Real effective exchange rates (REER by Bank for International Settlements, BIS REER) – exchange rates calculated by BIS. BIS REER is the average value of a currency to an index of other currencies, calculated daily for 27 (narrow) and 64 (broad) currencies of the main trading partners and taking into account inflation. For each period, the base of Index Currency and CPI are determined. Thus, for the period 2018–2023 based on Index 2020 = 100. BIS REER serves as a measure of currency stability as a reflection of the strength of the economy; the real rate used in the study is adjusted for relative consumer prices, including taxes (the study uses so-called broad effective exchange rate indices covering 64 countries).
Above macroeconomic indicators of Great Britain for the period 2004–2018 (Table 5), justified for the purposes of this study, are characterized by a number of dynamics. Such indicators as GDP, Labour productivity and Central government debt show growth in the period under review, and the growth of the latter (debt) created a budget deficit and the threat of default.
GDP increased over the period 2004–2018 by a total of + 23.4%. The growth rate of GDP was influenced by the global economic crisis of 2008–2009, with an average annual growth rate of + 1.7% for the period under review; in 2008, GDP showed stagnation (its volume remained almost at the level of 2007), and in 2009 – a drop of -4.5% compared to 2008. In addition, it can be assumed that the tax reform of 2010 affected the growth rate of GDP, since in the following years (2011–2012) GDP grew at a rate below average (+ 1.1–1.4%). A decrease in average annual growth rates was also observed after the 2016 reform (for example, if in 2017 GDP increased by + 2.4% compared to the previous period, then in 2018 it increased only by + 1.7%).
Labour productivity per employee shows a decline during the 2008–2009 crisis, with further recovery and steady growth since 2010: in 2012 the indicator increased to the pre-crisis level in 2007 (95.0) and to the level of 99.3 in 2018.
State debt is growing in the period under review, at a rate exceeding the growth of GDP – on average + 13.2% per year (in 2018, the excess of public debt by the beginning of the period under review was almost 3 times), at a rate above average during the crisis (+ 14. 1–16.0%), and then with growth spurts in 2011 (+ 13.4%, which may be a consequence of the reform), in 2014 and 2016–2017 (+ 11.2%, + 10.0% and + 7.7%, respectively, which is lower than the average annual rate for the period under review, but significantly higher than the growth rate in the periods preceding these years: for comparison – in 2013 + 0.2%, and in 2015 + 1.1%).
Unemployment rate and BIS REER GBP showing a decrease. The employment rate from 2006 until 2015 exceeds the threshold of 5.0%, and can be stated that unemployment in the UK increased during the crisis and continued to grow after it (from 5.3% in 2007 to the maximum of 8.0% in 2012 in period under review). For the first time, the unemployment index dropped below the threshold value only after the tax reform of 2016 (4.9% in 2017) and then continued its downward trend in 2018.
Stability and BIS REER low volatility is the most important indicator of the stability of the currency system and the economy as a whole. BIS REER GBP shows two trends. Common for the entire period - devaluation and two cases of decline: significant in 2008–2009 (-20.6%) and a smaller one – in 2016 (-14.2%), after which it did not recover to its original values until the end of 2018 (98.85 in 2018 with the pre-crisis 122.19 in 2007). Due to the lack of sufficient growth rates in the period 2017–2018 (only + 0.4% in 2017 and − 1.2% in 2018) the 2016 tax reform could also have an impact.
Quality of Life Index is the most important socio-economic indicator in the macroeconomic policies of countries, one of the guidelines of the UN and international economic institutions. The UK Quality of Life Index as a whole shows growth over the period (almost 1.5 times in 2018 compared to 2012), with a slight decrease in 2017–2018 (within − 5%), which may indicate the consequences of the 2016 tax reform. However, it is possible that these fluctuations also depend on changes in the methodology for its calculation.
CPI is a subject to the most severe fluctuations - growth as during the crisis of 2008–2009 (up to 3.6% in 2008 compared to 2.3% in 2007), and after both tax reforms in 2010 and 2016 (from 3.3% in 2010 to 4.5% in 2011 and from 0.7% in 2016 to 2.7% in 2017). In general, during the period under review, this indicator almost doubled.
In this way, the impact of the global economic crisis of 2008–2009 is statistically recorded on UK macroeconomic performance, and, more cautiously, the effect of the 2010 and 2016 tax reforms on a number of them.
During the study, general scientific methods were used, such as analysis and synthesis, as well as methods of econometric analysis. In this case, special attention is paid to the use of regression analysis of the impact of the tax burden on each of the selected macroeconomic indicators. The formula for identifying the interrelation between the studied indicators (linear regression equation) in general is as follows:
Y = Q0 + Q1 * X, where
(1)
X – tax burden level (TTCR),
Y – macroeconomic indicator, the influence on which is considered (from the Table 7);
Q0, Q1 – regression coefficients.
For the search of regression coefficients and, accordingly, completing regression equations for each of the macroeconomic indicators from Table 6, we used the linear regression model (LinearRegression) and its attributes (reg_model.intercept, reg_model.coef) from the sklearn (or scikit-learn) library in Python4. The obtained regression coefficients presented in Table 7. In this case, the coefficient Q1 shows how much the value of Yi changes on average when X increases by one unit of its own measurement, and the sign of Q1 shows the direction of the dependence.
Table 6
Сoefficients from equations of regression describing the interrelations between TTCR and the UK macroeconomic indicators
Macroeconomic Indicators
|
Q0
|
Q1
|
GDP, constant 2015, $ billion
|
5 453.913
|
-79.827
|
Unemployment rate, %
|
-8.118
|
0.422
|
CPI (consumer price inflation) annual rate, %
|
-6.647
|
0.267
|
Labour productivity, whole economy, output per worker (2019 = 100)
|
130.719
|
-1.066
|
Central government debt, total (current LCU, £ billion)
|
11 744.744
|
-282.936
|
Quality of Life Index (by Numbeo)
|
551.371
|
-12.448
|
BIS REER GBP (Broad, 64 economies)
|
75.538
|
1.019
|
Compiled by the authors.
Constructed regression equations were tested for statistical significance by calculating the standard deviation of the residuals (RSE – residual standard error) and the coefficient of determination R2 (“R squared”). Also, the parameters of the regression equations were checked using the Student's t-test (t-test): by comparing the actually obtained values with the tabulated t1−ε/2 at the confidence level (1 – ε) with the number of degrees of freedom (n – 2, where n is the number of observations), then is, with the selected ε = 0.05, we obtain for comparison the value of the Student's t-test equal to 2.16. The results of testing the constructed models shown in Table 7. To calculate the R indicator, a linear regression model (LinearRegression) and its function (r2_score) from the sklearn (or scikit-learn) library in Python were used. To determine the value of the RSE and t-test metrics, the following formulas were used:
$$RSE= \sqrt{\frac{1}{n-2}* \sum _{i=1}^{n}{\left(Yi-{Q}_{0}- {Q}_{1}*Xi\right)}^{2}}$$
,
$$t-test= \frac{\left|{Q}_{1}\right|}{SE\left({Q}_{1}\right)}, SE\left({Q}_{1}\right)= \sqrt{\frac{\sum _{i=1}^{n}{\left(Yi-{Q}_{0}- {Q}_{1}*Xi\right)}^{2}}{n-2}}* \sqrt{\frac{1}{\sum _{i=1}^{n}{(Xi- \stackrel{-}{X})}^{2}}} \text{o}\text{r} RSE* \sqrt{\frac{1}{\sum _{i=1}^{n}{(Xi- \stackrel{-}{X})}^{2}}}, \text{w}\text{h}\text{e}\text{r}\text{e}$$
(2)
n – number of observations,
Xi – tax burden level (TTCR) for period i,
Yi – macroeconomic indicator, which influence is considered, for period i;
Q0, Q1 – regression coefficients;
\(\stackrel{-}{X}\) – the average of the values accepted by the variable Xi.
Table 7
Assessment of accuracy of the models constructed to identify the dependencies between TTCR and the UK macroeconomic indicators
Macroeconomic Indicators
|
RSE
|
R2
|
Student's t-test (t-test)
|
Сonclusion
|
GDP, constant 2015, $ billion
|
70.619
|
0.858
|
8.869
|
The dependence was revealed
|
Unemployment rate, %
|
1.170
|
0.381
|
2.828
|
The dependence was not revealed
|
CPI (consumer price inflation) annual rate, %
|
1.009
|
0.249
|
2.075
|
The dependence was not revealed
|
Labour productivity, whole economy, output per worker (2019 = 100)
|
1.282
|
0.766
|
6.525
|
The dependence was revealed
|
Central government debt, total (current LCU, £ billion)
|
492.050
|
0.610
|
4.511
|
The dependence is questionable
|
Quality of Life Index (by Numbeo)
|
6.351
|
0.842
|
8.323
|
The dependence was revealed
|
BIS REER GBP (Broad, 64 economies)
|
11.715
|
0.035
|
0.683
|
The dependence was not revealed
|
Compiled by the authors.
As a result of the study, it can be concluded that three of the seven specified determinants have the confident statistically significant interrelations with the level of tax burden – these are GDP, Labour productivity and Quality of life index. It is not possible to assert that there is a direct dependence between TTCR and the volume of government debt (indicator “Central government debt”) without additional research. Since the results of the study of the dependence between these factors showed a borderline value of the coefficient of determination R2 (“R squared”) with a sufficient value of the Student’s t-test, dependence is possible between these indicators (TTCR and the volume of government debt) and it makes sense to check on cases with the inclusion of more countries that are included in the same group with the UK in terms of the level of tax burden or ranked by the level of government debt (it is also possible to group countries according to both parameters). The characteristics of the constructed models for three other indicators (Unemployment rate, CPI, BIS REER GBP) do not allow us to talk about the presence of interrelations with the level of tax burden in the UK over a defined period, however, as in the case of the volume of government debt, it would be useful to conduct further analysis with inclusion of more countries, after which the conclusions can be refined.