OECD declares 'era of low taxes' over as UK faces fresh tax-hit fears
Paris-based organisation says governments are reversing pandemic-era tax reliefs amid rising debt and spending needs; UK officials and business groups prepare for more measures
A new report from the Organisation for Economic Cooperation and Development says the global trend toward lower taxes that followed the Covid-19 pandemic has ended, a development that coincides with fears that Britain’s Labour government may announce further tax increases to repair a hole in the public finances.
The OECD, which groups 38 developed economies, said governments eased tax burdens during the pandemic but that trend began to reverse two years ago and has “now solidified.” It said a mix of tax increases and narrower tax relief measures has replaced the broader cuts of the Covid era as countries seek to mobilise more revenues in the face of high debt and “significant emerging spending needs relating to climate change, ageing and, in some countries, increased defence spending.”
In Britain, the OECD’s assessment comes against a backdrop of measures already enacted by the Labour government and speculation about further steps Chancellor Rachel Reeves might take. The government’s last Budget included changes to capital gains tax, employer national insurance, inheritance tax and the extension of VAT to private schools; the package was estimated by some analysts to raise about £40 billion.
Officials and advisers have warned that additional measures may be needed to close what some Treasury figures describe as a fiscal shortfall that could reach as much as £50 billion. Areas reportedly under consideration in media and market commentary include pensions taxation, stamp duty, measures on rental income and bank profits, and a further freeze in income tax thresholds.
Labour entered office with a pledge not to increase taxes on what it described as “working people,” a definition that covered income tax, national insurance and VAT. Ministers have defended the decision to raise employer national insurance, arguing it does not directly affect employees’ payslips, though the measure has been blamed by critics for raising the cost of hiring and for contributing to higher unemployment.
Some business leaders have urged the government to reconsider maintaining a pledge on personal taxes rather than relying on measures they say disproportionately affect companies. Rain Newton-Smith, chief executive of the Confederation of British Industry, wrote this week that “the time for tinkering is over” and cautioned against “slavish adherence” to pre-election commitments if they hinder efforts to stabilise public finances and support growth.
Financial institutions have also weighed in on the likely mix of fiscal adjustments. Analysts at Goldman Sachs said in a client note that historically, spending-based fiscal consolidations tend to deliver more sustainable deficit improvements than tax-based adjustments. However, they added that recent political developments, including Labour’s reversal on planned welfare reforms, suggested that delivering significant spending reductions could be politically difficult, making sizable tax increases more likely.
The OECD report framed Britain’s situation as part of a wider global pattern. It said jurisdictions at all income levels are adopting strategies to raise revenues as they confront tighter debt positions and new spending demands. The group did not prescribe specific policies, but its analysis highlighted the fiscal pressure many governments now face after years of pandemic-era relief followed by rising costs linked to climate mitigation, ageing populations and security concerns.
Markets and business groups are watching Chancellor Reeves closely. Some corporate voices have argued that further increases focused on businesses could damage investment and growth, while others have called for a broader review of government spending priorities. The Treasury has not confirmed any specific new measures.
The OECD’s findings mark a notable shift from the short-term tax relief that characterised many countries’ pandemic responses and set a sober context for fiscal debates in the UK and internationally as policymakers weigh how to reconcile competing demands for public services, investment and deficit reduction.
