Wealthy countries are witnessing a surge in tax revenues, reaching levels unseen in decades, as they grapple with the challenges of financing expanded state spending in the face of rising interest rates that diminish the appeal of borrowing.
Data from the Organization for Economic Cooperation and Development (OECD) reveals record-high tax revenues as a percentage of economic output in major economies like France, Japan, and South Korea. These increases, amounting to hundreds of billions of dollars, are essential for governments addressing diverse spending needs, from military priorities to industrial policies.
This trend reflects a broader shift toward larger government roles, amplified by the impact of the Covid-19 pandemic, heightened national-security concerns, an aging population, and the global fight against climate change.
In the U.S., tax receipts at all government levels reached nearly 28% of GDP in the past year, the highest since at least 1965, signaling a departure from levels seen during the late 1990s when budget surpluses were achieved through tax increases, spending restraint, and robust economic growth.
European nations like France and Germany have also experienced an increase in tax receipts, reaching levels not seen since records began in 1965. In Asia, tax-to-GDP ratios in Japan and South Korea have reached record highs, approaching European levels.
This rise in tax revenues, outpacing economic growth, signals an expanding government role in the economy, potentially affecting household spending and entrepreneurship. While actual tax rate increases have not been universal, fiscal drag caused by high inflation has pushed taxpayers into higher brackets.
Experts suggest that advanced economies, including Germany and the U.K., may witness actual tax increases in the future. The trend of higher tax receipts is expected to continue, driven by rising borrowing costs and increased state-spending needs.
Governments across advanced economies are currently spending about 2 percentage points more of GDP than in 2019, reflecting a shift to 41% of GDP compared to 39% before the pandemic. Government revenue is predicted to rise to around 32% of GDP in the U.S. by 2027.
Governments are also heavily relying on debt markets, with government debt standing at around 112% of GDP across advanced economies. As interest rates rise, borrowing and refinancing existing debt become more expensive, contributing to an expected net spending of $2 trillion on interest globally this year.
This shift towards increased taxation signifies a departure from the market-oriented consensus dominant since 1980. In the eurozone, government spending is set to reach half of the region’s economic output, while the U.S. stands at 38%, above its prepandemic level.
New challenges, such as caring for aging populations and financing green energy infrastructure, will add significant government expenditures across advanced economies. The ability to run large deficits is limited in a world of low growth and higher interest rates.
While some countries like the U.S. and Italy may have room to raise taxes, it remains politically challenging. China, facing pressure to raise taxes due to rising national debt, and other high-tax European countries might need to explore targeted spending cuts as an alternative. The delicate balance lies in finding effective fiscal measures without hindering economic incentives or prompting companies to relocate.