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    Home » The UK should press ahead with the inevitable on tax
    ECONOMY

    The UK should press ahead with the inevitable on tax

    Arabian Media staffBy Arabian Media staffJuly 10, 2025No Comments4 Mins Read
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    The writer is president of Queens’ College, Cambridge, and an adviser to Allianz and Gramercy

    It did not take long after last week’s UK fiscal drama for the typical political response to emerge. There was a swift pivot from a focus on what happened — the gutting of the government’s welfare reform bill and market-destabilising scenes in parliament — to looking at how it happened.

    Yet it would be an economic mistake to defer addressing the “what” at a time when fiscal issues are set to continue to command significant global attention, from the UK to the US and beyond.

    The root cause of last week’s UK government fiscal drama has been years in the making. Growth has stagnated amid increasing demands on public spending, including those associated with the pandemic.

    Higher taxes, while material, have been insufficient to curb a surge in indebtedness, increasing the economy’s vulnerability to the vagaries of international bond markets. As the Office for Budget Responsibility warned this week, the UK faces “daunting” risks to the public finances as its soaring debt load leads to “substantial erosion” of its capacity to respond to future shocks.

    Concurrently, economic officials’ repeated struggle to regain control of both growth and fiscal dynamics has significantly eroded their influence and credibility within the political decision-making process.

    The UK is not alone in grappling with fiscal issues. Last week, the US Congress passed what President Donald Trump terms the “big, beautiful bill”, a measure his one-time close adviser, Elon Musk, described as “utterly insane and destructive”.

    Similar issues are prominent across many other economies, including Europe, where there is strong interest in increasing defence and infrastructure spending but limited progress on crucial region-wide initiatives.

    To complicate matters further, this intensifying fiscal focus coincides with unfavourable economic and financial conditions. Deficits and debt levels are historically elevated, and inflation has yet to return comfortably to central bank targets.

    Meanwhile, market interest rates have risen. The notions of higher speed limits for fiscal spending — including those once promoted by Modern Monetary Theory supporters — seem a distant past.

    In such a global environment, there is simply no way to sideline fiscal issues. Rather than attempting another “reset” by diverting attention for political reasons, the government would be better advised to regain control of the fiscal narrative within a context of economic growth.

    This would involve three key elements. First is acknowledging that the changed domestic and international contexts necessitate revisiting election promises regarding increases to one or more core budgetary revenue sources: income taxes, VAT and employee national insurance contributions.

    Second is placing innovation policy more firmly at the centre of an even more aggressive and frontloaded growth strategy.

    And third is significantly improving the quality of the economic communication needed to secure private sector buy-in for growth-oriented reforms.

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    The good news is that there are positive factors for the government.

    The UK already boasts global leadership in certain innovations such as artificial intelligence and life sciences that hold enormous promise for enhancing productivity and growth. Translating this promise into reality is not about fitting it into a backward-looking industrial policy framework. Instead, it requires, at the minimum, a thoughtful and sustained approach to scaling up such innovation — lest it migrates to the US — and a better strategy for linking clusters and ecosystems.

    And notwithstanding last week’s bond market frisson, markets have demonstrated an uncanny ability not only to remind investors that “the economy is not the markets” but also to draw a dramatic distinction between the sovereign and the corporate. As such, the corporate sector has been less vulnerable than in the past to concerns about government debt and deficits.

    These conditions underscore why the UK government should press forward with the inevitable on both the fiscal and growth fronts. Waiting to clarify what the majority of economists see as unavoidable tax increases risks further damage to household consumption, corporate investment and overall growth.

    Should it delay in acting, the current window on innovation will prove harder to exploit for generalised economic and financial wellbeing, and corporates will become more vulnerable to sovereign contamination. This is the last thing the government and economy need.



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