Government revenue, explored: how much does the UK raise, and where does it come from?

Back again! This time to talk about the way that the UK government raises the money it spends.

We saw last time that the UK government spends the best part of a trillion pounds per year, with the health service and social welfare accounting for most (but by no means all) of spending. But how does the other side of the coin shape up? (Pun intended!)

Perhaps a good place to start is in similar territory to last time. How much revenue does the government raise each year?

The chart below shows us this. Previous, current, and forecast future government revenue. The orange line shows this in £billions (but with prices adjusted to allow meaningful comparison across years) and the blue line shows it as a share of GDP.

UK public sector receipts over time. Chart home-made, data from: OBR Public Finances Databank — March 2021

Some key points:

• The UK raised about £800bn in 2019–20. This has grown over time, mostly because of the economy growing, but you’ll see a dip at the start of the forecast period because of coronavirus / the recession. We are talking about huge sums of money!
• This is between 35% to 40% of GDP. This puts the UK roughly in the middle of the pack for the G7 advanced economies[BA(1] but is still huge!
• Most of this is comprised of taxes (as we will see below) and in fact the UK currently has its highest sustained tax revenues[BA(2] (as a share of GDP) since the 1940s.

So… the UK raises a lot of money every year to pay for its lots of spending. But does this all come from one single source, or several sources? Again, let’s examine the most recent Budget!

The forecast distribution of UK public spending in 2020–21. ‘Non-taxes’ includes things like revenue from government assets (e.g. shares in banks acquired during 2008 recession; student loans; etc.). Source: HM Treasury, Budget 2021

And, of course, highlight some of the chart’s key features:

• Income tax is the single biggest source of government revenue, with national insurance — the other chunky bit of tax taken directly from your payslip — not far behind. Together, these ‘payslip taxes’ comprise about 40% of total revenue, with VAT — a tax levied on consumption — bringing in a further 20% of the revenue.
• Significantly, the current Conservative government has pledged that it won’t increase any of the ‘big three’ taxes above… meaning that hands are mostly (though not completely) tied on a combined 60% of government’s revenues.
• If this pledge holds, it puts increased focus on the remaining revenue sources. For example: corporation tax (a tax on business profits which were increased at the most recent budget and so whose share of revenue will grow in the next few years); fuel duty (an excise duty on petrol and diesel which has been frozen for a while despite pressure from environmental groups); council tax (paid to local authorities to help fund local services); stamp duty (a tax on house purchases); and more… Importantly, though, these are ultimately all pretty small when compared with the ‘big three’ above.

We’ve now looked at government revenue, then, as well as government spending in the last blog… This means that we can look quickly now at something that connects the two: borrowing, which is quite literally the difference between what a country spends and raises each year!

The chart below shows spending (dashed grey line) and revenue (solid grey line), with borrowing the solid black line lower in the chart.

UK spending, revenue, and borrowing over time. Chart home-made, data from: OBR Public Finances Databank — March 2021

What does it tell us?

• We can see very clearly here the relationship between spending and revenue. For example, whilst in the same ballpark, spending tends to be a little higher than revenue does… and consequently a small but positive amount of borrowing (required when spending is higher than revenue) is the status quo in the UK.
• It’s also clear that the amount of borrowing is variable over time. There are, for example, some large peaks that match up with recessions in the UK. Remember that spending typically rises in a recession whilst revenues typically fall… so it’s unsurprising that borrowing typically grows in a recession!
• Borrowing gives governments important flexibility to spend on important things even when there is insufficient revenue to cover it! But it does also mean that the country accumulates debt. This might seem like a bad thing, but modest levels of borrowing (and debt) can actually be sustainable!

Government revenue in the UK is thus in roughly the same ball park as government spending (very large!); with a few key sources (income tax, national insurance, and VAT) accounting for the bulk of these funds. We’ve also seen that (a small amount of) borrowing is a pretty staple feature of the public finances, but will come back to borrowing in more detail in a future blog…