Rich nations are levying more taxes than in previous decades to meet the escalating demands of public spending. This is in response to the diminished appeal of borrowing for expenditure due to high-interest rates.
According to data provided by the Organisation for Economic Co-operation and Development (OECD), the proportion of budget revenue to Gross Domestic Product (GDP) has surged to unprecedented levels in several major economies, including France, Japan, and South Korea. The additional tax revenues, reaching hundreds of billions of USD, serve as a significant augmentation for the treasuries of governments grappling with various new spending requirements, spanning from military expenses to industrial policies.
An analysis by The Wall Street Journal observes this as a characteristic of a broader governmental trend-a trend shaped by the impact of the Covid-19 pandemic and intensified by concerns over national security in an increasingly politically divided world. Additionally, the trend is fueled by the escalating needs associated with an aging population and the heightened efforts in combating climate change.
In the United States, the overall tax revenue at all government levels escalated to nearly 28% of GDP in the past year, up from 25% in 2019. This marks the highest ratio since 1965, excluding a brief period during President Bill Clinton’s administration. In the late 1990s, the U.S. underwent a shift from budget deficits to surpluses through a combination of increased taxes, spending constraints, and robust economic growth.
In France and Germany, tax revenues have risen by around 1 percentage point of GDP since 2019, despite already being at elevated levels, reaching 46% and 39% of GDP, respectively. This marks the highest tax-to-GDP ratio in both countries since records began in 1965.
Recently, the German government unveiled a set of measures to increase energy taxes and trim expenditures in an effort to balance the budget for the upcoming year.
Across Asia, where tax and social welfare spending traditionally lag behind Europe, the tax-to-GDP ratio has also surged to record highs in Japan and South Korea, approaching European levels. The most recent data for Japan is from 2021.
The uptick in the budget revenue-to-GDP ratio suggests that taxes are increasing at a faster pace than the GDP growth rate, highlighting the growing role of the government in the economy. Economists argue that this trend tends to exert pressure on household spending and the business activities of enterprises. A larger share of individuals’ and businesses’ income is directed toward taxes, posing impediments to economic growth.
Up to this point, several governments have boosted tax revenues without necessarily upping tax rates. Instead, the surge in tax revenue results from elevated inflation pushing up prices and wages, leading many taxpayers to fall into higher tax brackets. However, experts suggest that actual tax hikes may be on the horizon for certain developed economies, such as Germany and the UK.
The pattern of escalating budget revenue derived from taxes is likely to persist as mounting borrowing costs clash with the surging demand for expenditures, spanning military budgets, elderly welfare, and efforts to combat climate change, according to Kurt van Dender, a tax statistician at the OECD. “The increased role of the government in the economy is unavoidable at this time”, he remarked.
Governments in developed economies are presently allocating an additional 2 percentage points of GDP compared to 2019, hovering around 41% of GDP versus the pre-pandemic 39%, as per data from the International Monetary Fund (IMF).
The International Monetary Fund (IMF) predicts that the US government’s budget will increase to 32% of the GDP by 2027, up from the 30% recorded in 2019.
The Congressional Budget Office (CBO) foresees a rise in the budget-to-GDP ratio as the tax cuts introduced during the presidency of Donald Trump expire post-2025.
However, Republicans have committed to preventing any tax hikes, while Democrats have vowed not to impose taxes on individuals earning less than $400,000 per year.
Achieving tax increases in the US may prove challenging due to the split control between the White House and Congress, with Democrats lacking a majority.
Apart from tax hikes, governments are actively pursuing borrowing from the bond market. In developed economies, government debt is hovering around 112% of GDP, an increase from 104% in 2019, and is expected to continue rising, as per IMF data. The higher interest rates make obtaining new loans and refinancing existing debt more expensive.
According to an analysis by the International Monetary Fund (IMF) using data from the research consulting firm Teal Insights, governments globally are anticipated to allocate around $2 trillion for servicing public debt this year. This figure reflects a more than 10% increase compared to the year 2022. Projections suggest that interest payments could surpass $3 trillion by 2027. Economist Dirk Schumacher from Natixis Bank has commented that the era of extremely low interest rates appears to be receding.
This trend suggests that wealthy nations, grappling with substantial public debt and budget deficits post-pandemic, may have limited alternatives other than increasing revenue through tax adjustments. The governments’ pursuit of funds signifies a departure from the consensus that has guided the dominant role of capital markets in the West since the 1980s. This consensus emphasized diminishing state support for businesses, removing restrictive regulatory oversight, and promoting trade liberalization.
In the Eurozone, comprising 20 countries, government spending is expected to reach approximately half of GDP this year. In the United States, government spending is currently at 38% of GDP, a ratio higher than the pre-pandemic period.
According to The Wall Street Journal.
By. Pham Thanh Bien
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