The size of the British state is growing by a larger amount than any other G7 nation apart from Germany since the pandemic in 2020, figures on government spending from the International Monetary Fund have shown.
The IMF’s latest report on countries’ fiscal outlook shows that UK government spending is set to rise by 5.2 percentage points between 2019 and 2031.
This will make the size of the state rise to 43.3 per cent of GDP in 2030 compared to a level of just 38.1 per cent before Covid-19 dramatically changed the course of public finances.
The US, France, Italy, Canada and Japan are projected to increase government spending by a smaller proportion as a share of their economies. France, Italy and Canada already spend more as a share of GDP.
Germany is the only country among the seven dominant economies that is set to increase spending by a higher level. Chancellor Friedrich Merz announced last year that borrowing rules would be significantly loosened to fund 838 billion euros (more than £700bn) in mainly defence investment through to 2030.
The fund’s report adds to anticipation ahead of Chancellor John Healey’s first budget, where he will be required to juggle spending pressures for the cost of living with limited scope against a difficult fiscal outlook.
Higher spending funded by huge tax rises
IMF forecasts also continued to project that the tax burden in the UK would grow at the fastest pace among advanced economies.
Revenue as a share of GDP will come to about 41.9 per cent by 2031 following tax raids on businesses and households by the Labour government, rising from 38.2 per cent in 2025.
Under current government plans, this would mean that the UK would go from having the second largest deficit in the G7, after only the US, in 2025 to posting the smallest one by 2031 at -1.4 per cent of GDP.
IMF managing director Kristalina Georgieva praised Labour ministers for taking “decisive” measures to limit borrowing as she said she thinks “the government recognises they need to stay the course”. On Wednesday, it was reported in the Financial Times that Chancellor John Healey would not raise borrowing in order to fund cost of living or business support, instead using tax hikes or spending cuts to fund proposals.
However, IMF officials warned the Chancellor against raising the tax burden further to fund defence spending.
Rodrigo Valdés, who leads the IMF’s research on fiscal policy, called for an “urgent” discussion about spending cuts when he was asked about how the UK could spend more on the military.
“In general, Europe has relatively high revenue ratios. So the space for a lot more revenues is not easy,” he said.
“[Tax] distorts at the end of the day, so the discussion about the social contract behind spending is very, very urgent in the sense that… less spending [will be] part of the new pressures that you will have from different sources.”
He added: “Debt spending will be very persistent. Defence spending will be persistent. So, even if you accommodate temporary risk with debt, you have to be prepared at some point to recognise that debt cannot forever finance this part.”