UK state growing at faster pace than France after spending splurge and tax hikes

Since the COVID-19 pandemic began in 2020, the size of the British government has been expanding at a faster rate than any other G7 nation aside from Germany, according to figures from the International Monetary Fund (IMF). The IMF's latest report on countries' fiscal outlook reveals that UK government spending is projected to increase by 5.2 percentage points between 2019 and 2031.

This projected rise in state expenditure will see the size of the British state reach 43.3% of GDP by 2030, compared to just 38.1% before the pandemic altered public finances.

While the US, France, Italy, Canada, and Japan are anticipated to raise government spending by a smaller proportion of their economies, France, Italy, and Canada currently spend a larger share of their GDP on government. Germany, however, is the sole country among these seven dominant economies that is expected to increase spending by a greater level.

Chancellor Friedrich Merz unveiled last year that borrowing rules would be significantly relaxed to fund 838 billion euros (over £700 billion) in mainly defense investment through 2030.

The IMF report adds to the anticipation surrounding Chancellor John Healey's first budget, where he will need to manage spending pressures for the cost of living crisis while dealing with limited room for maneuver and a challenging fiscal outlook. IMF forecasts also project that the tax burden in the UK will grow at the fastest pace among advanced economies.

Revenue as a share of GDP will reach approximately 41.9% by 2031, growing from 38.2% in 2025, following tax hikes on businesses and households by the Labour government.

The IMF managing director, Kristalina Georgieva, commended Labour ministers for taking "decisive" measures to limit borrowing. She believes that the government recognizes the need to stay the course. IMF officials, however, cautioned Chancellor John Healey against raising the tax burden further to fund cost of living or business support. Instead, they suggested using tax hikes or spending cuts to finance proposals.

Rodrigo Valdés, who leads the IMF's research on fiscal policy, called for an "urgent" discussion about spending cuts when questioned about how the UK could spend more on the military. He emphasized the importance of addressing the "social contract" behind spending, stating that less spending will be a key part of addressing new pressures from various sources.

He added that debt spending will be persistent, as will defense spending, and that accommodating temporary debt will require considering the long-term reality of debt financing such initiatives.