The UK government is expanding the size of the state more rapidly than all but one of its G7 counterparts since the pandemic, according to City AM, citing the IMF’s latest fiscal outlook report. IMF projections show UK state spending rising by 5.2 percentage points between 2019 and 2031, pushing the size of the state to 43.3 per cent of GDP in 2030, up from 38.1 per cent before the pandemic reshaped public finances.
Every other G7 member except Germany is forecast to expand spending by a smaller share of their respective economies. France, Italy and Canada already devote a greater portion of GDP to public expenditure than the UK does, yet their projected increases fall short of the UK’s. Germany is the only G7 member set to expand spending by a higher proportion, after Chancellor Friedrich Merz announced that borrowing rules would be significantly loosened to fund EUR 838 billion (more than £700bn) in mainly defence investment through to 2030.
Tax burden set for fastest rise among advanced economies
IMF forecasts also project that the UK’s tax burden will outpace every other advanced economy in its rate of growth. Revenue measured as a proportion of GDP is set to reach about 41.9 per cent by 2031, up from 38.2 per cent in 2025, following tax rises on businesses and households under the Labour government.
Under current government plans, that trajectory would take the UK from having the second-largest deficit in the G7, behind only the US, in 2025, to recording the narrowest shortfall among the group at -1.4 per cent of GDP in 2031. On that outlook, IMF managing director Kristalina Georgieva praised Labour ministers for taking ‘decisive’ measures to limit borrowing, adding that she thinks ‘the government recognises they need to stay the course’.
The IMF report arrives ahead of Chancellor John Healey’s first budget. The Financial Times reported that Healey would not raise borrowing to fund cost of living or business support, instead relying on tax rises or spending cuts to fund any proposals.
IMF cautions against further tax rises for defence
Despite the IMF’s broadly supportive tone on fiscal consolidation, its officials warned against raising taxes further to cover higher defence spending. Rodrigo Valdés, the IMF official responsible for fiscal policy research, called for an ‘urgent’ discussion about spending cuts when asked 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.’
Valdés 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.’
Chancellor Healey’s budget will be the next test of how the government balances those defence commitments against the IMF’s caution on further tax rises and the spending pressures the fund’s outlook sets out.
