The real tax burden is public spending, which continues to rise

The tax burden plays a central role in political debate, particularly in highly indebted countries. A general increase in government revenue, relative to a country’s GDP, places a strain on taxpayers as a whole and on the economy. It is no coincidence that those standing for election to govern a country rarely promise to increase the tax burden. Rather, the commitment is to reduce it or to redistribute it differently across various sectors and categories. However, the end result is often the opposite. The tax burden tends to rise, fuelling endless debates over the interpretation of the figures, with the result that citizens lose confidence.

The problem stems from the way in which the tax burden is defined and calculated. It is generally measured as the ratio of a country’s total tax and social security revenue to its GDP. This is fundamentally flawed, particularly if one wishes to analyse the underlying trends in a country’s public finances. However, the tax burden should not be calculated as the ratio of tax revenue to GDP, but rather as the ratio of public expenditure to gross domestic product.

Focusing on the revenue side rather than the expenditure side actually leads to a series of distortions both in public debate and in the conduct of economic policy. Firstly, it gives the impression that it is possible to increase expenditure beyond what is covered by tax revenue without any cost to citizens. It creates the illusion that issuing government bonds to finance expenditure in excess of revenue has no consequences, ignoring the interest payments on the debt, which tend to rise as the size of the debt itself increases. Furthermore, reducing the tax burden without a corresponding reduction in expenditure is not sustainable over time. Ignoring expenditure trends, in both the short and medium term, fuels the misguided argument that a tax cut can stimulate economic growth to such an extent as to generate sufficient tax revenue to plug the initial budget deficit. These are the so-called ‘self-financing measures’, which in reality do not exist.

Examining the tax burden from the perspective of public expenditure is the only way to initiate a serious debate on the consolidation of public finances. In all European countries, the problems caused by public debt stem from expenditure, not from revenue. Over the last decade, the average tax burden in European countries has remained largely unchanged, rising from around 46.4 per cent in the years prior to the pandemic to 46.8 per cent last year, according to IMF estimates. During the same period, however, average expenditure rose from around 47 per cent of GDP to 50 per cent. It is close to 60 per cent in some countries such as France (57.4), Finland (58.7) and Belgium (55). In the absence of measures to reduce the burden of expenditure, the tax burden is set to rise, regardless of what is promised to voters.

Moreover, the European countries that have exceeded the 50 per cent threshold for public spending as a proportion of GDP – Germany, France, Italy, Belgium, Austria and Finland – are precisely those that have recorded the lowest growth in recent years, below the European average. There is a statistically significant negative correlation between public spending and economic growth. This does not necessarily imply a precise causal link. But it is certainly the case that the countries which have increased their spending the most in recent years have not grown the most. Quite the contrary.

Controlling and reducing public spending are precisely the objectives of the European Stability Pact, which was reformed in 2024 with the consent of all Member States. Under the new Pact, each country undertakes to implement multi-annual spending plans designed to reduce the ratio of public spending to GDP over time. Only in this way can the need to raise taxes and implement ‘austerity’ programmes be avoided. The new Pact has been in force for just a couple of years, and calls for exemptions are already being made, particularly to use extraordinary tax revenues – derived from the inflation tax – to fund new expenditure. In essence, this amounts to raising the tax burden and postponing fiscal consolidation, thereby exposing public finances – and the economic system as a whole – to turbulence in the financial markets, as is currently unfolding.

The tax burden is too high in Europe and is holding back economic growth. The only way forward is to reduce the overall level of spending and improve its quality. Promising more spending ultimately means raising taxes. For everyone.