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Britain’s workforce could shrink by two million people if governments keep leaning on stealth taxes, the Office for Budget Responsibility has warned, in analysis that lands squarely on the desk of prime minister-in-waiting Andy Burnham and should alarm every employer in the country.
The fiscal watchdog’s latest long-term sustainability report concludes that repeated tax rises under both Conservative and Labour governments are inflicting growing damage on the economy, with each fresh raid delivering diminishing returns. It also cautioned that stealth tax raids would become harder to sustain as AI threatens to eliminate one in ten jobs.
For small business owners already wrestling with recruitment, the central finding is stark. If future governments permanently uprated income tax thresholds in line with prices rather than earnings, two-thirds of all workers, more than 20 million people, would become higher-rate taxpayers within a few decades. That is every full-time worker, even those on the minimum wage
Under that scenario, the OBR estimates “labour supply could fall by around two million” workers by 2075. For those people, work would simply no longer pay. For the firms hoping to hire them, the labour pool gets shallower still.
The mechanism is one SME employers know well. Rishi Sunak froze income tax thresholds in cash terms until 2028 and Rachel Reeves extended the policy into the next decade. OBR data show the freeze is already set to pull five million more people into the higher and additional rate bands, and fiscal drag is already pushing millions of Britons into higher tax brackets, among them nurses, teachers and supermarket managers. For business owners, that means staff demanding higher gross pay just to stand still, at a time when payroll costs are climbing anyway.
David Miles, an executive member of the OBR, said stealth raids might look politically easier than raising headline rates, but the cost is real. “It would be painful, because … if you carry on doing that decade after decade, it isn’t too far down the road until the great majority of people are higher rate taxpayers,” he said. That would affect people’s “willingness to work, willingness to stay in the UK [and] to save, to pay taxes if income tax rates rose by that amount. So it’s not a painless road to go down”.
The backdrop is grim. National debt is close to £3tn, around 95 per cent of GDP, and the watchdog has previously warned that debt could hit almost 300 per cent of GDP within 50 years. The OBR says Burnham, or any future prime minister, could face tax rises or spending cuts worth as much as £120bn to stabilise debt at current levels. Business Matters reported last year that the watchdog was already warning of significant tax rises ahead; this report suggests the well is running dry.
The tax burden is on course to reach a peacetime high of 38.5 per cent of GDP by the start of the next decade, and Miles warned Britain was “catching up” with higher-tax continental Europe. Of relying on further rises, including proposals from Burnham allies for wealth taxes, he said: “It’s not that the pain just increases a little bit, it starts increasing exponentially.”
That leaves spending. Many point to the pension triple lock, which the OBR says is making “a very significant contribution” to upward pressure on spending. Linking it to inflation alone would save £160bn a year in today’s money by 2075. Lord O’Neill of Gatley, tipped as Burnham’s key economic adviser, has called the lock “bonkers”. Burnham has committed to keeping it.
Jeremy Hunt, the former chancellor, put it bluntly: “The OBR makes it clear that unless we tackle the triple lock we will end up with totally unsustainable levels of both tax and debt.”
For the SMEs that employ most of Britain’s private sector workforce, the message is uncomfortable. Whoever occupies Number 10, the era of quiet tax rises doing the heavy lifting is ending, and the bill is heading somewhere.
