Tax Policy Pulse: An Age of Uncertainty

The 'green transition' is simultaneously an environmental imperative, an industrial opportunity, and a source of geopolitical competition.

Commitments to reach net zero will demand huge capital reallocation across energy, transport, and industry. The cost of meeting the climate challenge – subsidies, infrastructure, adaptation – competes also directly with other urgent spending demands, including on national defence and social care.

However, military conflict in Ukraine and the Middle East has highlighted the strategic importance of domestic energy security. Control of the rare earths and critical minerals vital to 'green' technologies, dominated by China, has become a cause of international competition and tension, and encouraged other economies – led most notably by the Trump Administration – to turn back fossil-fuel-based sources of energy.

The result is an asymmetric adoption of 'green' technologies and policies globally, as the imperative to reach net zero collides with the imperative to secure future energy supply.

Ageing populations across developed economies are reshaping labour markets, public finances, and the traditional 'social contract' between state and citizen.

Greater dependency on the state increases pension, health, and social care costs. Shrinking working-age populations constrain labour supply, suppress productivity, create pressure on wages, and fuel the divisive politics of immigration.

The burden of funding the state falls on a proportionally smaller tax base, increasing pressure on a government's ability to balance expenditure and raise additional revenue.

The digital transformation of the global economy has altered where, how, and by whom economic value is created. This has had profound implications for existing tax systems designed around physical presence and human labour. The current frameworks struggle to satisfactorily define taxable presence in a digitalised economy where capital and services can move freely across borders.

Artificial intelligence (AI) has accelerated digitalisation across all sectors, but adoption has been uneven between jurisdictions, sectors, and businesses of different sizes. AI can serve as a valuable tool for both taxpayers and tax authorities – [for more discussion on this, see the chapter on AI in Tax] – but asymmetric adoption will raise new compliance and administration challenges.

The post-Cold War assumption that economic integration would promote political stability was undermined by the GFC. Globalisation reduced absolute poverty around the world but increased wealth and income inequality within nations, creating the political conditions for a backlash. Since the GFC, globalisation has slowed, giving way to a world in which the economic interdependence it created has been 'weaponised'.

Trade policy has become a strategic instrument of competition and protection. Tariffs, export controls, border adjustment mechanisms, sanctions, and regulation of foreign direct investment have all increased. Governments are also showing greater willingness to use fiscal policy to attract and protect strategic industries: the United States (US) Inflation Reduction Act and CHIPS Act, and the European Union (EU) Green Industrial Plan and Net Zero Industry Act are recent examples.

A new 'grand competition' has emerged between the world's three major economic blocs: the US, China, and the EU. UK policy needs to navigate between all three and businesses need to continue to build resilience through 'friend-shoring', diversification, and accepting higher costs to secure lower risk.

The UK economy is structurally exposed. It has a relatively narrow, services-export-dominated economy. While it remains an attractive destination for migrant workers – unlike some other developed economies, like Japan – it has become dependent on immigration for workforce growth at a time when political pressure to reduce net migration is growing (precisely because of that dependance). After Brexit, the UK sits outside the European single market, with its trading relationship with the EU still evolving and regulatory divergence adds friction. Outside the economic bloc, options for large scale fiscal stimulus in the UK are limited.

The UK is the fifth largest global national economy (by nominal gross domestic product (GDP)). Two decades of economic shocks (the GFC, Brexit, Covid, energy price spikes), each requiring increased government borrowing, however, have left the UK's public finances severely constrained:

• average annual GDP growth has halved, from approximately 3% to 1.5%;
• national debt has nearly trebled as a share of GDP, from approximately 36% to 99%;
• servicing the UK debt consumes a growing share of tax revenue, reaching approximately 10.8% in 2025-26 (more than spent on education, defence, or public order) – this, according to the Resolution Foundation, means the "UK now has the highest borrowing costs of any rich OECD country"¹; and
• the tax burden has increased from approximately 33% to 38% of GDP, a post-war record – the UK tax burden is now higher than most other English-speaking economies and is moving closer to western European countries (which spend more on public goods and social protection).

Post-GFC austerity reduced public spending but resulted in chronic underinvestment in services and infrastructure. Following further economic shocks, however, the UK's capacity for further borrowing has been exhausted precisely when demands for greater spending on defence, the green transition, health and social care, and the digital economy have become more insistent.

Reflecting the intractability of the challenges, the UK has – at last count – had eight Prime Ministers² and ten Chancellors of the Exchequer³ since the GFC. This unprecedented churn has produced tax policy characterised by inconsistency and uncertainty. Corporation tax is illustrative: repeated changes of direction, from steady reductions to sharp increases in the main rate.

The uncertainty undermines long-term business planning. Political turmoil has produced policy swings that lead businesses to rationally discount the durability of any given incentive or commitment on tax.

With an ageing population and constrained migration, the UK's fiscal sustainability depends on productivity gains that have historically failed to materialise. The productivity gap is persistent, driven by underinvestment in capital equipment, skills deficits, planning constraints, and low business dynamism.