BNP Paribas warns that ageing populations and net zero could lead to higher tax rates

A City bank warned that the transition towards net zero, and pressures from an ageing population could push up tax burdens.

BNP Paribas analysts, a French multinational banking company, stated that the spending demands of several economic shifts would mean states will likely be permanently larger.

Marcelo Carvalho said that it was unlikely for the tax burden to be reduced in any meaningful way anywhere on the planet.

It’s likely to either stay where it is, or go higher.

This warning comes at a time when debt levels have skyrocketed in many advanced economies in the wake Covid and Europe’s energy crisis.

The UK tax burden is on its way to reaching the highest level since World War II, according to the fiscal watchdog. By 2027-2028, it’s predicted that the tax burden will equal 37,7pc GDP.

Mr Carvalho stated: “With Covid we saw spending go up everywhere. In the West, emerging markets, and everywhere else. Everyone’s expenditure increased. “Now it’s coming back [down], but I don’t think it will go all the way back to pre-Covid.”

He said: “The political dynamic [means] that it is easy to increase expenditure but very difficult to reduce it.”

According to the Office for Budget Responsibility, the UK government debt has reached its highest level in more than 60 year at 100pc GDP.

In spite of all chancellors committing since 2010 to bring down debt levels, they only fell in three out of the last 12 years.

Mr Carvalho stated that the pandemic has created a demand for increased health spending, “along with the long-term need to invest in climate related activities”.

BNP Paribas chief European economist Paul Hollingsworth said that demographics is one of “very large structural forces” which will pose serious challenges to public finances over the medium-term.

According to the OBR, the ratio between working-age people and retirees will drop from four to one to three to one over the next fifty years despite increased immigration.

Mr Hollingsworth stated: “I believe that we will be left with a higher structural level of spending in the future, but at a higher cost of debt servicing than before.

It means that governments will have to give more priority. They will not be able spend on all areas and may have to make some cuts.

The UK’s borrowing cost is at its highest level in 15 years.

Mr Hollingsworth stated that the British economy will grow at a slower rate than it did in the last two years when the Covid catch-up effect triggered growth rates as high as 8.7pc by 2021, and 4.1pc by 2022.

Hollingsworth stated: “I believe the fundamental principles established post-pandemic are prioritising investments, given the challenges we face in steering towards Net Zero as well as improving digitalisation.

These are the core components that many advanced economies will be spending their money on.

Climate Change Committee previously estimated that moving to a lower-carbon economy would cost between 0.5 and 0.6pc per year of GDP over the next decade, but it is very difficult to estimate.

While Mr Hollingsworth said that next year the UK could see the first Labour government for nearly 15 years, he warned that “the higher costs of borrowing” and the weakening of the public finances would put a lot of restrictions on the winner.

He said, “From a fiscal perspective, there’s not much you can do.” It was not like there was much room for manoeuvre.

You can alter the balance between taxation and expenditure. This is probably what a Labour-led government would do. In comparison to a Conservative Government, you’d likely see higher taxes and spending.

But in terms of the aggregate fiscal situation, there are important constraints. Many governments are in similar situations where the issue is really a question of distribution.