People will flee the country rather than pay any more tax

This week the economists at the National Institute for Economic and Social Research (NIESR) said the UK’s dire fiscal situation means that, with high levels of debt and no scope to cut public spending, after the election taxes will have to rise regardless of who wins – or alternatively, that Jeremy Hunt’s fiscal rules will have to be abandoned.

Total government revenues from taxes and other sources are currently scheduled to reach 41pc of GDP this year. That compares with 37pc as recently as in 2019-2020 and 32pc if we go back to the mid-1990s.

The last time government revenues were above 41pc was 1969-70, for just one year. The last time they were above 41pc for several years in a row was in the late 1940s and early 1950s.

Could taxes be raised materially higher even than is currently scheduled?

I suspect not. In fact, I suspect even Hunt’s plans won’t be deliverable.

A key reason taxes have not been maintained at these sorts of levels for several years in a row since the late 1940s/early 1950s, let alone being raised even above that, is that the UK economy is not capable of generating that much revenue.

And it won’t be capable of generating it any time soon, either.

It is often noted that tax levels in the UK have been, over time, several percentage points lower than rates in some of our continental European peers.

What is less recognised is that there is an important relationship between the levels of taxes and the structure of a country’s economy and society.

Partly because our tax rates have historically been lower, but also because of features such as our tradition of a solid rule of law; confidence that UK governments (regardless of their political hue) will not introduce arbitrary wealth confiscation; our welcoming attitude towards foreign immigrants and foreign investments; the UK tends to attract a disproportionate amount of the world’s most mobile capital and high-income labour.

Think of finance professionals, lawyers, high-skill management consultants, highly-educated design professionals and those in similar professions.

The UK creates and trains its citizens into these roles, disproportionately to our share of the global population, and we also attract foreign-born workers of this type.

We also draw in foreign investors and manage the assets of wealthy individuals and institutions.

The ability to entice this globally-mobile capital and high-value labour is what is called “competitiveness”. Other economies envy our ability to do it.

But one side-effect of our having high shares of such mobile factors is that if we tried to raise taxes on them they would tend to depart.

In any country the attempt to raise taxes beyond a certain point risks failing, because the attempt to raise taxes damages the economy enough that taxes actually fall rather than rising.

But in the UK, because such a high share of our economy involves highly-globally-mobile capital and labour, the issue is more acute than elsewhere.

In our current situation, rather than further tax rises increasing the tax share of GDP closer to the levels normal in our continental rivals, it is more likely that the attempt to raise taxes fails because first, it induces recession, making the tax take fall; second, it causes capital flight, reducing the tax base; and third, it leads to the emigration of high-income and high-wealth individuals, again reducing the tax base.

Perhaps eventually, after decades of adjustment, our economy would adapt and we would settle down to higher percentages of GDP than we have been used to.

But that would involve significant structural changes in our economy. Losing our unusually high share of internationally-mobile capital and high-income and high-wealth individuals would change our economy in ways it is hard to predict precisely, but we can get some idea.

It would probably mean a lower share of GDP would be taken by finance and legal professionals, business consultants, software developers and manufacturing design experts than is the case today.

We might have lower house prices in London as that ceased to be a safe haven for international assets. There would be less venture capital for start-ups and less of our businesses would be owned by foreign firms and individuals.

“Sounds good!” I hear some readers cry. Maybe. But the key relevant point for now is that getting there would take decades, and for most of the meantime our economy would be producing less tax, relative to GDP, than it does now.

So whether or not inducing such a structural shift would be desirable over the medium-term, it would do nothing to address the upcoming fiscal crisis that will greet whichever party wins the election.

So it’s unlikely taxes can rise. What else is there? Spending should be cut, but that means cutting NHS spending and no government will do that unless forced to by international lenders. The last time it really happened was under the IMF austerity programme in the 1970s.

We could try structural reforms to get the economy growing faster, so debt falls relative to GDP.

Both parties say they want to do that – Labour in particular says it wants to “Get Britain Building Again”. But will it work, and if it does work will it be fast enough? I doubt it.

The only thing left is to inflate away the debt, probably by allowing UK inflation to be persistently higher over a number of years (though the 1970s route of a few years of 10-20pc  inflation would also work). My guess is that the inflation target will be raised to 3pc soon. But even that might not be enough.

We are soon to face a fiscal reckoning.