Balancing Taxes and Spending
The UK government faces a challenging task in the upcoming October Budget. Prime Minister Sir Keir Starmer and Chancellor Rachel Reeves have acknowledged the need for "difficult decisions" regarding taxes, spending, and benefits. However, they remain committed to their election pledge of not raising income tax, National Insurance, or VAT rates.
The government's annual budget exceeds £1 trillion, a staggering sum equivalent to £1,000 billion or a one followed by 12 zeros. This immense amount could comfortably purchase the UK's 10 most valuable companies. On a per capita basis, it translates to roughly £15,000 for each UK resident.
Income tax, levied on individuals' earnings, is projected to contribute approximately £303 billion in the 2024/2025 financial year, representing roughly a quarter of the government's total revenue. This figure is expected to rise in the coming years due to the freezing of income tax thresholds until 2028. Consequently, more individuals will fall into higher tax brackets as their wages increase.
VAT, a tax applied to various purchases, and National Insurance, another tax on earnings, are the next two largest sources of government revenue. The Office for Budget Responsibility (OBR) forecasts VAT to generate £203 billion in 2024/25, while National Insurance is expected to contribute £168 billion.
Social protection spending, encompassing benefits for pensioners and working-age individuals, constitutes the largest expenditure category for the government, accounting for over a quarter of its total spending. The OBR predicts this spending to reach £371 billion in 2024-25. Health spending, driven by an aging population and rising treatment costs, represents approximately one-fifth of government expenditure. The OBR forecasts health spending to reach £251 billion in 2024/25.
The government faces the challenge of balancing its revenue and expenditure while adhering to its election pledges. The upcoming budget will likely involve adjustments to various spending programs and potential changes to tax policies.