Britain must balance its books

The British government is like a family that is struggling to pay the bills, drowning in credit card debt, and yet still choosing to eat out for dinner once a week. We’ve ignored the cracks in our home for so long we’ve stopped noticing them — the neglected renovations, the outdated energy systems – and we’re now increasingly ignoring the mounting pressure on our day-to-day finances as well. It’s a picture of denial that we will have to face.

This sense of financial imbalance is perhaps clearest when looking at ONS data on taxes and benefits. The latest release shows that the “net recipience rate” — the proportion of households that receive more in state spending (cash benefits and benefits in kind such as state schooling) than they pay in taxes – is at 53 per cent. That is, more than half of households are effectively living above their means, subsidised by the remainder. 

In concept, net recipience is not something to get exercised over – it maintains living standards across the country and ensures a healthy safety net for those that need it. A compassionate society with a functioning welfare system should have net recipients. But with net recipience marching upwards for a half century — from 37 per cent when records began in 1977, to 40 per cent in 2000, to 53 per cent in 2023 — trouble looms.

It is not reactionary to say that 53 per cent net recipience is bonkers. It redefines the purpose of the tax and benefits system; it is no longer about supporting the vulnerable and becomes instead a mass subsidy supporting lifestyles we can’t afford. We’ve stopped checking our public bank balance, and we won’t tighten our belt because we see our spending commitments as too important: the NHS, the pensions, the environmental targets.And admittedly, these seem – as all things tend to in life — like they could do with more cash. But increasingly, it falls to a small number of high earners to keep the whole system afloat: the top tenth of households make an average net tax contribution of over £58,000 per year.Even then, ‘afloat’ is a strong word.

But there should be no cruel accusations that the people who are now net recipients are “scroungers” – far from it. The new cohort of net recipients — the extra 4 million since 2019/20 — are working households. The middle fifth of non-retired households, earning an average original income of over £50,000, were net recipients in both 2021 and 2022. Two decent full-time salaries or one high salary, still taking out more than they put in. No wonder there’s a sense of malaise – this is clearly not their fault. It is overspend, not underwork.

And net recipience figures, as they focus on current spending, exclude debt servicing costs, which for the foreseeable future will exceed £100 billion a year. The credit card debt continues to rise in the background, while making each month add up is getting more and more difficult.

How on earth did we get here?

In a new report for the think tank Civitas, I and my colleagues suggest a mixture of explanations. As is often the case with struggling households, this country’s economy has been knocked sideways by shocks, and these shocks have uncovered problems that were bubbling away under the surface.

To start, we are still deep in the Covid-19 crisis. While eye-watering injections of government cash and the immediate shock to indirect tax receipts from no one spending money during lockdowns were short-term, the harm is not. A surge in long-term sickness and work-limiting health conditions has weakened our tax base; these are closely covid related.

Looking further, total state spending has climbed relentlessly – save for a slight pause during ‘austerity’ – since the turn of the century. Total managed expenditure was just 35 per cent of GDP in 1999/00, but was up to 45 per cent of GDP in 2023/24. Most of this rise was due to two crises: the Global Financial Crisis and the Covid crisis, neither of which we have properly recovered from. Average real weekly earnings were growing beautifully alongside spending at a third a decade each decade from 1977 to 2007, but they have not grown at all since the Financial Crisis struck in 2007.

Income inequality (pre taxes and benefits), which rose substantially from 37 per cent to 54per cent between 1977 and 2008, pushed up net recipience, as a larger share of taxes was paid by the highest earners. But income inequality is way down since 2008, and is now the lowest it has been since the early 1990s – not least because the country is running out of rich people – and net recipience has shown no such reversion. There has been too much upward pressure on net recipience elsewhere.

Britain’s ageing population is also a cause for concern. Our evidence does not suggest it has been a major factor in getting us here, but it will be a further pressure for tomorrow. It is another sign of our deteriorating economic resilience. Again, this is not accusatory — no one is in trouble for getting older, it being rather hard to avoid — but reality beckons. 

We need to acknowledge that the books are not balanced and haven’t been for years

Our earnings base is weakening as our spending commitments grow. We are beginning to live in two realities: the standard of living we experience, and the standard of living we can afford. The gap between the two is widening, and the bridge can’t hold forever. There are already warning signs – the millionaires we depend on are leaving in record numbers and our public debt relentlessly climbs – and these won’t go away.

It reminds me of a moment as a university student when, having spent my money as if I had plenty, I realised one evening that I needed to gingerly knock on a (coincidentally ginger) friend’s door and ask to share dinner with him because I was out of cash. I realised I was poorer than I wished I was. It wasn’t ideal, but I was happier for facing the facts. It’s perhaps time for the British government to do the same. We don’t need grand new schemes. We need to acknowledge that the books are not balanced and haven’t been for years. We need to spend less. This government has already shown proficiency in tolerating unpopularity, so perhaps this grim challenge is their calling.