The Treasury mindset

There are strong arguments to suggest that the UK Treasury is too focused on maximizing tax revenues at the expense of broader goals such as economic growth, living standards, and fairness.

The Treasury mindset is to pursue revenue maximization at the expense of economic growth. Critics argue that the Treasury often prioritizes tax measures that generate reliable short-term revenue, sometimes at the expense of long-term productivity.

High marginal tax rates or complex tax structures may discourage investment, entrepreneurship, or work, and frequent tax changes create uncertainty, deterring long-term business planning and capital investment.

And there is always a Laffer Curve lurking in the long grass. Beyond a certain point, increasing tax rates can actually reduce total revenue by shrinking the tax base. Many economic analysts argue that the UK is near or past this point in areas such as income tax or corporate tax.

Taxes designed to squeeze the maximum revenue have impact upon living standards. Some UK taxes disproportionately affect low- and middle-income households. VAT, fuel duties and council tax reduce their disposable income.

The interaction of income tax, National Insurance, and benefit withdrawal rates can create very high effective marginal tax rates for low earners, reducing work incentives and trapping people in poverty. Stamp Duty is often seen as inflating house prices, making housing less affordable and dragging down living standards, particularly for younger generations.

The UK tax system is often seen as unfair, partly because of its complexity and opacity. The UK tax code is extremely complex, running to many times the length of the entire collected works of Shakespeare. This benefits tax lawyers and those who can afford tax advisers. But it reduces transparency and makes it harder for the public to judge whether the system is fair.

 The Treasury's dominance in UK economic policymaking means that decisions are often made with a narrow fiscal lens, focused on deficit targets or departmental spending caps rather than a holistic view of long-term economic transformation.

Treasury modelling has historically been conservative about the long-term, dynamic impacts of tax cuts or investment spending on productivity and growth, which may undervalue policies that raise growth and living standards over time. Their more static outlook usually underestimates the changes in public behaviour that all taxes bring about. Because of this the actual receipts often fall short of those predicted. 

There is a case for arguing that the Treasury should prioritize broader outcomes such as well-being and productivity growth, alongside fiscal balance.

The core of this critique is that a narrow focus on extracting revenue, often in static, annualized terms, can lead to less than optimal economic outcomes. A more balanced approach would integrate tax policy with strategic goals like fairness, productivity, and sustainable growth. While fiscal responsibility is crucial, so is ensuring that taxation supports a thriving, profitable economy in the long run.

Madsen Pirie