How have government revenues changed over time?
UK tax revenue is forecast to reach its highest ever level. One major trend since the 1970s has been a shift towards VAT.
Tax revenue forecast to reach historical highs
UK tax revenue is forecast to total £950 billion in 2023–24, equivalent to 36.9% of gross domestic productGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more (GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more).
Under current government plans, tax revenue is forecast to rise to 37.7% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more by 2027–28. If this happens, it will represent the highest level of tax ever seen in the UK. While this would be high by historical standards, the UK would continue to have middling levels of taxation by international standards.
Total government revenues, which include both tax and non-tax revenues (such as the interest paid on student loans and the profits of state-owned industry), are forecast to rise to 41.7% by 2027–28, historically high but not unprecedented.
Revenue moves with wars, the economy, and political preferences
As might be expected given the extra expenditure required, taxation rose substantially during both World Wars. In both cases, taxation did not fall back to its pre-war level after the outbreak of peace, leaving government revenue permanently expanded in the wake of the conflict. In the decades following the Second World War, revenue from taxation rose sharply in the late 1960s, was highly volatile in the 1970s (partly reflecting large fluctuations in economic growth) and then fell steadily as a proportion of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more from the early 1980s until the mid 1990s. Tax revenue grew from the mid 1990s until the turn of the millennium, and in recent years it has increased again, bringing the UK tax take broadly back to the level seen at its post-war peak in the late 1940s.
While tax revenue had, by 2000–01, returned roughly to the levels seen in the early 1980s, this was not the case for total government revenue. This is because the large-scale privatisations of state-owned industry that occurred over the course of the 1980s, while boosting revenues at the time, significantly reduced the subsequent profits government received from publicly owned corporations, from an average of 4.0% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more a year during the 1970s to under 1% in the 1990s, where it has remained ever since.
Across the developed world, the evolution of the UK’s tax burden is relatively distinctive. In the early post-war years, the UK was a relatively high-tax country, and the large increases in the UK’s tax burden that took place over the 1960s ensured that it remained so into the 1970s. In most other industrial countries, the state continued to grow at least into the 1980s and often beyond; by contrast, UK tax revenue fell as a percentage of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more in this period. Today, UK tax revenue is middling by international standards, higher than in Australia or the United States but lower than in France or Italy.
VAT and NICs have become more important revenue sources
Income tax is easily the single largest source of revenue, but its relative importance has changed over time. In 1978–79, income tax made up 26% of government revenue. A decade later, that figure had fallen to 21% as a result of substantial reductions in income tax rates implemented by Margaret Thatcher’s Conservative government. Then, during the 1990s, it rose, fell and rose again to regain much of its relative importance, stabilising at around 26% of government revenue through the 2000s. Across much of the 2010s, income tax again experienced a relative decline in importance as a result of large increases in the tax-free personal allowance. The 2020s have seen yet another reversal, with real-terms reductions to income tax thresholds and allowances returning the tax to a level of importance similar to that seen in the 2000s.
In contrast, National Insurance contributions (NICs) – essentially another tax on earnings – had been creeping up over time, rising from around 15% of government revenue in the early 2000s to around 18% in 2020–21. However, a partial reversal of this increase is expected in the coming years. The balance between income tax and NICs matters because there are some notable forms of income that are not subject to NICs, including some investment income, pension income and income earned above the state pension age.
The biggest change over the past 40 years has come from changes in taxes on spending. Value added tax (VAT) now brings in around 15% of government revenue, which is double the share it accounted for in 1978–79. This large increase came from rate rises in 1978, 1991 and 2011. At the same time, revenues from other indirect taxes – a category comprising both excise duties such as fuel and tobacco duties and environmental taxes – have fallen significantly. This relative decline has been primarily driven by falling revenues from tobacco duties (as a result of fewer smokers), alcohol duties (as a result of below-inflationInflation is the change in prices for goods and services over time.Read more increases in wine and spirit duties) and, since 2000, fuel duties (as a result of real-terms reductions in fuel duties combined with increased fuel-efficiency of cars). The move away from taxes levied on specific goods towards general consumption taxes such as VAT is mirrored across the developed world.
These broad revenue trends mask very many changes in the structure of taxes, which matter, for example, for who is paying different taxes and the effects they have. A summary of the changes up to 2016 can be found in section 4 of the IFS Briefing Note here.