Tax Policy Pulse: An Age of Uncertainty

Tax Policy Pulse: An Age of Uncertainty

Overview

The long shadow of the global financial crisis (GFC), Brexit, and the Covid pandemic, compounded by tariff diplomacy and energy price shocks caused by military conflict in Ukraine and the Middle East, have led to volatility on domestic and global markets, and created uncertainty about the global economy's ability to grow. That uncertainty weighs heavily on M&A activity: confidence weakens, transactions stall, decision-making slows, and structuring becomes more cautious and defensive.

Unfortunately, what once might have been 'one-off' events have regularly punctuated the last 20 years or more. Uncertainty is the only certainty there is. This article considers the structural forces behind that uncertainty and what it might mean for United Kingdom (UK) tax policy, and for dealmakers hoping to navigate it, in the coming years.

Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.

John Allen Paulos, A Mathematician Plays the Stock Market, 2003

Grand Challenges

There are four main 'grand challenges' that are reshaping the global economy.

  • 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.

These forces do not operate in isolation; they interact and compound each other. Climate change will aggravate global migration. Meeting the challenges posed by climate change, digitalisation and the adoption of artificial intelligence will require accessing critical minerals concentrated in geopolitically contested regions. Ensuring energy security may, conversely, slow the transition away from carbon intensive energy and industry. Geopolitical and geoeconomic competition will reshape existing supply chains and relocate centres of economic activity. AI may facilitate greater economic productivity but could also exacerbate inequality and increase pressure on the future of work and trigger more migration.

Policymakers and businesses face simultaneous, interrelated challenges in constant flux, at a time when sluggish economic growth makes financing competing (and growing) demands impossible without difficult trade-offs. This has created acute pressure — nowhere more so than in the UK.

The UK Position

These pressures have a unique gloss in the UK. 

  • 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.

These are obviously not tax problems, but they provide the background for tax policy announcements, and tax is one of only a few policy levers available to a government looking to tackle them.

Constrained Choices

Faced with rising spending demands and limited revenue, a government has four main response options:

  • First, it can reduce public spending — but after years of austerity, the perceived decline in public services, and growing calls for greater spending, further cuts will be politically difficult, even for a newly installed Prime Minister.
  • Second, it can borrow — but borrowing requires willing lenders with confidence in UK economic performance. The September 2022 gilt market crisis demonstrated the constraints on the UK's borrowing capacity and resulted in the government's repeated commitments to follow its self-imposed fiscal rules to calm the markets. Elevated interest costs illustrate the importance of eliminating the deficit to reduce total debt.
  • Third, it can deliver economic growth — the most attractive and sustainable option, but growth has been elusive, uncertain, and dependent on structural reforms that are themselves expensive and take years to deliver.
  • Fourth, it can increase taxes – but the UK tax burden is already at a historic high and set to rise further in the next few years through policies of 'fiscal drag'. The more tax a government places on an activity, the less of that activity it gets: increased business taxes tend to suppress investment; increased capital taxes on individuals tend to encourage them to leave or set up elsewhere. The impact of the 2024 increase in employer National Insurance contributions (NIC) illustrates the negative effect.

Tax policy needs to work harder, not just as a revenue tool but as a policy instrument to facilitate economic growth.

UK Tax Policy

Tax reform can take different forms. Tax policy can be an agent of positive behavioural change: it can reduce administrative burdens, simplify rules, incentivise investment, enable business activity, encourage entrepreneurship, remove disincentives, and facilitate economic growth.

Unfortunately, Budget announcements have been characterised by incremental tinkering (rate adjustments, freezing thresholds, new anti-avoidance rules) that add length and complexity to the UK tax code without addressing its inconsistencies. Simplification is consistently promised but rarely delivered. In addition, those changes that have been introduced have failed to strike the right balance between the need to raise revenues with the professed 'mission' to secure higher sustained economic growth.

"Tax policy needs to work harder, not just as a revenue tool but as a policy instrument to facilitate economic growth."

Joseph Sheldrick, Senior Counsel, Tax

International Tax Policy

UK tax policy does not exist in a silo. International cooperation to tackle abusive tax avoidance arrangements by multinationals — culminating in the G20/OECD BEPS Action Plan and the 2021 Two Pillar Solution — is also fragmenting.

Although Pillar Two (the global minimum tax) has been implemented by approximately 60 jurisdictions, including the UK, the US has negotiated a 'Side by Side' framework allowing its tax system to co-exist outside Pillar Two. The US has also effectively vetoed Pillar One (on the cross-border allocation of taxing rights), critically undermining efforts to reach a multilateral consensus.

Dissatisfied with lack of progress at the OECD, many developing countries (led by the G77 and Global South) are exploring a United Nations Framework Convention on International Tax Cooperation that, if successful, would profoundly change the existing, OECD-based, international tax framework.

Meanwhile, jurisdictions (including the UK) will continue to legislate unilaterally to protect their tax base with measures such as digital services taxes (DSTs), increasing complexity and the risk of double taxation. In addition, DSTs disproportionately impact large US technology companies and have inevitably been met with US retaliation through Section 301 investigations and the imposition of tariffs. Tax policy has become another theatre for geoeconomic competition.

Tax Policy in the Deal

In an age of uncertainty, it is unsurprising that tax policy is also changing. The rational business response is to 'wait and see', to delay investment and capital commitment. Transactions stall, decision-making slows, exits become more difficult, and firms seek 'safer' targets and future protection for deal values. Another Budget, by another new Chancellor, will be delivered on 28 October 2026 and we expect it to introduce more – and potentially more radical – change. Based on Budget 2025, the run-up to Budget Day will be punctuated by speculation, leaks and 'flying kites', a period that itself created hugely damaging uncertainty.

Travers Smith Budget Tracker 2026

The problem is that reduced investment and dealmaking depress economic growth, increasing pressure on public revenue and creating more tax policy uncertainty — a vicious cycle. Deal pricing that treats tax assumptions as fixed inputs is probably mispricing that uncertainty. Due diligence should now extend to cover tax policy change risk.

The challenge for government is to raise revenue in a way that treads as lightly as possible on business and makes the UK as attractive as possible in the new geoeconomic environment. Rising taxes are rarely good for investment but tax reform in this context can present an opportunity. It might mean more efficient revenue collection and tackling the 'tax gap', but it could also mean more fundamental reform to rationalise the more complicated areas of UK tax law. Since the government will need private capital, it may also look at new tax-geared incentives and industrial policy to encourage it.

For dealmakers, the imperative is not to wait for certainty, or a return to 'normality', but to build agility and creativity through analytical frameworks that accommodate a range of possible outcomes. The drivers of uncertainty — climate and demographic change, digitalisation and AI, geopolitical competition — will continue to reshape the economic and tax policy environment for the near future. The best positioned businesses will be those that understand the wider context, the likely direction of travel, and engage proactively with policy development to plan for an uncertain future.

References

1 Resolution Foundation (2025), UK exceptionalism on high borrowing costs driven by ‘sticky’ inflation and a reliance on the ‘kindness of strangers’, Resolution Foundation, UK exceptionalism on high borrowing costs driven by ‘sticky’ inflation and a reliance on the ‘kindness of strangers’

2 Andy Burnham (2026-current); Sir Keir Starmer (2024-2026); Rishi Sunak (2022-2024); Liz Truss (2022); Boris Johnson (2019-2022); Theresa May (2016-2019); David Cameron (2010-2016); Gordon Brown (2007-2010).

3 John Healey (2026-current); Rachel Reeves (2024-2026); Jeremy Hunt (2022-2024); Kwasi Kwarteng (2022); Nadhim Zahawi (2022); Rishi Sunak (2020-2022); Sajid Javid (2019-2020); Philip Hammond (2016-2019); George Osborne (2010-2016); Alistair Darling (2007-2010).

Authors

Read Joseph Sheldrick Profile
Joseph Sheldrick
Read Robert O'Hare Profile
Robert O'Hare
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