American economist Arthur Laffer warns Andy Burnham against another Budget tax raid as Britain pays a painful premium to borrow, the tax burden heads towards a record high and markets demand convincing answers from Labour.
There are moments when financial markets deliver a message to governments rather more effectively than any opposition politician ever could. Britain is experiencing one of them.
Government borrowing costs surged last week, with the yield on benchmark 10-year gilts touching 5.294 per cent on Wednesday, its highest level since August 2007. Britain has been caught up in a wider international bond sell-off, intensified by renewed conflict in the Gulf and rising oil prices, but the pressure on UK government debt has been particularly uncomfortable.
And with Prime Minister Andy Burnham and Chancellor John Healey preparing for their first Budget on October 28, one of America’s most famous tax economists has a very simple message for Labour.
Stop reaching for higher taxes.
Arthur Laffer, the veteran American economist synonymous with the supply-side revolution of the Reagan era, has warned that Britain risks entering what he regards as a destructive cycle in which high taxation suppresses growth, weak growth undermines the public finances and governments respond by demanding still more from taxpayers.
In an interview with The Telegraph ahead of a visit to London, Laffer delivered the memorable verdict that Britain is “taxing itself into death”. He argued that the country’s underlying problem is not a shortage of tax revenue, but insufficient economic growth and prosperity.
It is a brutal assessment.
It is also one Labour would be foolish simply to dismiss.
Who is Arthur Laffer?
Laffer, 86, is one of the best-known advocates of supply-side economics in the United States.
He served on Ronald Reagan’s Economic Policy Advisory Board and became particularly associated with the economic argument that tax rates can eventually become so high that increasing them further damages incentives, economic activity and, ultimately, the government’s ability to raise revenue.
His name became attached to the Laffer Curve, although the basic economic principle long predates him.
Imagine government tax revenue plotted against the tax rate. At zero taxation, government obviously receives nothing. But it does not automatically follow that continually increasing the rate will continually increase revenue by the same amount.
As tax rates become sufficiently onerous, behaviour changes. People may work less, invest less, defer activity, restructure businesses, move capital abroad, increase avoidance or decide that taking additional economic risks is simply no longer worthwhile.
The controversial question is not whether taxation affects behaviour, but where the point lies at which higher rates begin doing more harm than good. Economists have argued over that for decades.
Laffer’s prescriptions have plenty of critics, and tax cuts do not automatically pay for themselves. But his central warning about incentives becomes particularly pertinent when a government is presiding over an economy in which the tax burden is already heading towards historic territory.
And that is precisely where Labour finds itself.
Britain’s tax burden is heading for a record
The Office for Budget Responsibility’s March 2026 forecast makes uncomfortable reading.
It projects the tax-to-GDP ratio reaching 38.5 per cent by 2030-31, which the fiscal watchdog describes as a post-war high.
More significantly for the argument Labour now faces, the OBR itself warns that a higher tax burden increases the danger of the tax system distorting or constraining economic activity. It specifically highlights incentives to work, save and invest.
That should stop ministers in their tracks.
Britain’s problem is not simply the amount of money Whitehall collects. It is whether the economy underneath that enormous state machine can grow quickly enough to sustain it.
The Government cannot indefinitely treat businesses, investors, entrepreneurs and higher earners as an inexhaustible cash machine.
There comes a point at which people change their behaviour.
Capital is mobile. Investment is discretionary. Entrepreneurs do not have to start their next company here. International businesses do not have to choose Britain for their next expansion.
And wealth creators certainly do not owe the Treasury an endless supply of money irrespective of the conditions government creates for them.
Then there is the debt
Britain’s public finances hardly give Labour room for complacency.
Official ONS figures put public sector net debt at just under £3 trillion at the end of June, equivalent to 94.9 per cent of GDP. That was £122.3 billion higher in cash terms than a year earlier.
That mountain of debt becomes considerably more painful when the interest demanded by investors rises.
And that is why last week’s movements in the gilt market matter.
A gilt yield is, in simple terms, the return investors demand for lending money to the British Government. When investors demand a higher yield, government financing becomes more expensive.
The 10-year yield reached 5.294 per cent on Wednesday, while longer-dated borrowing costs have also been under pressure.
This is not solely a British phenomenon and Conservative Post would be misleading readers if we claimed otherwise.
Bond markets around the world have been hit by concerns over inflation, debt and geopolitical instability. Bank of England Governor Andrew Bailey has pointed to deeper pressures across advanced economies, including ageing populations, poor productivity, the legacy of Covid and rising defence expenditure.
But that does not absolve Labour of responsibility for Britain’s particular vulnerability.
Reuters reported that Pantheon Macroeconomics estimates the Government’s fiscal headroom may have shrunk from £23.6 billion to around £13 billion following the movement in yields, potentially requiring roughly £11 billion of measures if Healey wanted to restore the previous buffer.
And there lies Labour’s looming Budget nightmare.
Higher borrowing costs mean higher debt-servicing costs.
Higher debt costs eat into fiscal headroom.
Less headroom increases pressure for spending cuts, higher taxes or still more borrowing.
More borrowing risks unsettling investors further.
And another indiscriminate tax raid risks weakening precisely the investment and growth Britain needs to escape the trap.
Laffer calls that sort of cycle a “death spiral”.
Whatever one thinks of his terminology, the economic danger deserves to be taken seriously.
Labour cannot tax its way to growth
There is something extraordinary about the position Labour has managed to reach.
Healey is expected to use a major speech on Monday to set out his approach to growth ahead of his first Budget. Reuters reports that he and Burnham have retained the fiscal framework inherited from the previous Labour administration, including the objective of balancing day-to-day expenditure with tax receipts by the end of the decade.
The Telegraph reports that the Chancellor will emphasise the importance of private-sector wealth creation.
If so, Conservatives should welcome the conversion.
But recognising that businesses create wealth is the easy part.
Creating the conditions in which they actually want to create it is rather harder.
A government cannot spend Monday praising entrepreneurs and then spend Budget day wondering what else it can take from them.
It cannot simultaneously tell international investors that Britain is open for business while continually raising the possibility of fresh taxes on the capital, companies and individuals it wants to attract.
Nor can ministers pretend that economic growth is something government can simply announce into existence.
Growth comes when somebody takes a risk.
When a business hires its tenth employee.
When a manufacturer builds another production line.
When an overseas company chooses Birmingham rather than Berlin.
When an entrepreneur decides to build the next company in Britain rather than Dubai, America or Singapore.
When somebody decides that working another ten hours, investing another £100,000 or opening another shop is actually worth doing.
Government’s job should be to make those decisions easier, not progressively less attractive.
Burnham now faces a choice
There is an important distinction between fiscal responsibility and simply raising taxes.
Britain plainly cannot embark upon reckless, unfunded spending. The bond market has demonstrated repeatedly that governments ignore fiscal credibility at their peril.
But fiscal responsibility also means controlling what the state spends.
That side of the equation seems considerably less fashionable in Labour circles.
If the Budget black hole has grown, Burnham and Healey face a choice. They can confront expenditure, pursue serious supply-side reform, encourage investment and concentrate relentlessly on productivity and growth.
Or they can reach once again for the familiar Labour solution and ask taxpayers for more.
The latter may be politically easier inside the Labour Party.
Economically, it could prove very expensive indeed.
There is an irony in a Labour Government talking enthusiastically about creating “fiscal headroom” while presiding over a tax burden forecast to reach a post-war high and borrowing costs close to levels not seen for two decades.
Headroom does not only come from extracting more money from the economy.
It can come from growing the economy.
And Britain desperately needs to rediscover that distinction.
Laffer’s economic philosophy will not persuade everybody. Nor should any government simply transplant an American economic doctrine wholesale into Britain.
But the question at the heart of his warning is one Burnham cannot dodge:
At what point does taxing Britain’s wealth creators more cease to strengthen the public finances and start weakening the economy that supports them?
With the tax burden heading towards 38.5 per cent of GDP and investors demanding more than 5 per cent to lend to the British Government for ten years, that is no longer an academic debate.
It is the question sitting on the Chancellor’s desk.
And if Labour’s answer on October 28 is simply another tax raid, it will have been warned.
Britain does not need another lesson in how to divide up wealth. It needs a government that remembers how wealth is created in the first place.
The Conservative Post has independently checked the public-finance, tax and bond-market figures in this article against ONS, OBR and Reuters reporting. Arthur Laffer’s comments were made in an interview with The Telegraph, whose original reporting we credit.
Main Image: For illustration purposes.
