£1trillion tax burden... the highest since WWII

THE Treasury is set to take in £1trillion for the first time this year as Britain’s tax burden hits its highest level since the Second World War.

As Chancellor Jeremy Hunt unveiled a swathe of spending cuts and tax hikes, it was revealed that the Treasury would receive the record amount in taxes, dividends and other income this year.

The sum will hit £1.2trillion by 2027/28. Britons will be paying tax equivalent to 37.1 per cent of the size of the economy, the highest share since the Second World War.

This year alone, £909.6billion of the money flowing in to the Treasury’s coffers will come from taxpayers – £16.3billion more than the Government’s Budget watchdog predicted in march. While households squeezed by the cost of living crunch will feel the pain, the Treasury will be grateful for the extra cash as it faces a growing bill.

Before the pandemic, state spending was around 39 per cent of the size of the economy. This year, it will be 47.3 per cent or £1.2trillion, according to the Office for Budget Responsibility.

Laith Khalaf, of investment platform AJ Bell, said: ‘mr Hunt’s tax rises and spending cuts are designed to fill a black hole in public finances which has been left by a weakened economic outlook, higher government borrowing costs, and the enormous energy support package provided to consumers and businesses.’ While public spending will begin to fall from next year, it will still be at 43 per cent of the size of the economy in five years’ time, meaning the size of the state is at its largest since the 1970s. Borrowing will have to rise to cover these vast outgoings. Last year the Government borrowed £133.3billion. This year it will take £177billion.

All of this will push the UK’s towering debt pile to £2.6trillion by the end of this financial year. Next year, the debt mountain will hit £2.8trillion, or 106.7 per cent of the size of the economy – a 64-year peak.

But as the Treasury borrows more, debt interest payments rise even further. The Government’s interest bill will balloon from £56.4billion last year to £120.4billion this year – the highest as a proportion of the economy since immediately after the Second World War. Debt interest spending will then average £93billion over the next five years. The Treasury has been left reeling by the unprecedented speed at which the Bank of England has hiked its base interest rate this year. Desperate to get a lid on inflation, by encouraging saving rather than spending, the Bank has bumped up rates from their pandemic low of 0.1 per cent to 3 per cent.

But this has ramped up the cost of borrowing for the Government. Inflation has also played a more direct role, as around a quarter of the national debt is linked to the RPI measure of inflation – currently at 14.2 per cent. mr Khalaf said: ‘Very small movements in rates and [Government bond] yields, either positive or negative, can produce a starkly different pitch for the Government’s tax and spending plans – and the battleground for the next election.’