The High-Tax, Low-Growth Trap

A painful reality is forcing a long-overdue reckoning across Europe, and the United Kingdom (and France) are the canary in the coal mine. For decades, the U.K. and France have tried to square an impossible circle: maintaining very generous welfare states with low growth. That debate is now being decisively resolved by economic gravity. Faced with soaring debt and anemic growth, Britain’s new Labour government is preparing its second major tax increase in only two years, a £30 billion hit aimed at plugging a budget deficit that ended 2024 at 5.7% of GDP.

  • This move will push the U.K.’s total tax take to its highest-ever level, around 37% to 38% of GDP. While still short of high-tax anchors like Germany and France, it signals the end of an era.
  • The core of the crisis is simple: claims on government spending are rising sharply, but the economic growth needed to pay for them has vanished.

Politicians like U.K. Prime Minister Keir Starmer are left with only unappealing choices: cut spending, raise taxes, or take on more debt. With interest rates high, the debt-fueled path of least resistance is now closed. This is the trap that defines modern Europe, and it is being driven by structural rot that leaders have refused to address.

The Demographic Time Bomb and the Pension Ponzi Scheme

The primary driver of Europe's soaring spending is not a mystery—it is demographics. An ageing population is placing an unbearable financial burden squarely on the shoulders of the younger, working generation.

  • The problem is systemic. Most of Europe is built on distributional (pay-as-you-go) pension systems, where current workers pay for current retirees. This model only functions in a world of high birth rates and high growth.
  • Today, with inverted population pyramids, it has become a state-sanctioned Ponzi scheme. Claims from a swelling older generation are consuming an ever-larger slice of national wealth, forcing governments to either borrow more, tax more, or cut benefits.
  • This unworkable system will force a reckoning. Politicians, terrified of the electoral power of older voters, refuse to touch the third rail of reform.

We see this in France, where lawmakers appear poised to unwind even modest changes to the country's bloated pension system, and in the U.K., where Starmer's government was rebuffed by his own party for attempting minor reforms to disability payments.

The Green Anchor on a Sclerotic Economy

This demographic crisis is colliding with a catastrophic failure of economic policy. Europe’s growth is sclerotic, and this is not by accident. It is the direct result of deliberate policy choices.

  • For decades, EU-style bureaucratic policies and, more recently, zealous green objectives have piled regulatory burdens and uncompetitive energy costs onto the continent's industries.
  • These policies have destroyed the U.K.'s and Europe's chances of meaningful growth.
  • Germany is the premier example. It taxes wages more than almost any other rich nation, taking nearly 50% of the average employee's gross wages. This has depressed consumption and killed growth.
  • Following the Cold War, Germany slashed defense spending to pour money into its welfare state.

Now, it needs to re-arm and fix its "decrepit" rail system and "potholed roads," but its high-tax, low-growth, green-policy model provides no surplus to do so. The U.K., by raising taxes to 37% of GDP, is now walking directly down this same failed path, guaranteeing its own economic stagnation.

The Political Break: Instability and the Rise of the Right

When mainstream governments offer citizens nothing but a choice between higher taxes, service cuts, or national bankruptcy, the political system breaks. The "unstable politics" mentioned in France, which has seen three governments collapse in less than a year, is not an isolated event. In the U.K., Starmer’s government has seen its popularity plunge as it confronts the "unappealing choices" left to it.

  • This is the fertile ground from which the far-right is becoming an evidence in many European countries.
  • Its rise is not occurring in a vacuum. It is a direct and logical consequence of a mainstream political class that has failed to secure the two most basic functions of a state: economic prosperity and a sustainable social contract.
  • The public is rejecting a consensus that has led them into a demographic death spiral, crippled their economies with green regulation, and now demands they pay higher taxes for a declining quality of life.

The U.K.'s £30 billion tax hike is not a solution. It is a symptom of a continent that has run out of road, money, and time.

The Pro-Growth Reforms of the 1990s

This bleak, high-tax, low-growth outlook stands in stark contrast to the wave of successful, supply-side reforms that transformed struggling economies in the 1990s. These nations proved that prosperity comes from unleashing the private sector, not from expanding the state.

The American Work-First Revolution

In the United States, the 1996 Personal Responsibility and Work Opportunity Reconciliation Act fundamentally reformed welfare. It replaced the old entitlement with a work-first program (TANF) that included time limits and state-level flexibility. The results were immediate and profound.

  • Welfare Caseloads: Dropped by an unprecedented 60% between 1994 and 2004.
  • Employment: Employment rates for low-income, single mothers—the group most affected—soared from 58% in 1993 to nearly 75% by 2000.
  • Income: As earnings from work replaced government checks, the total real income for these families increased by over 25%, and child poverty fell to its lowest level since 1978.

The "Celtic Tiger": Ireland's Low-Tax Miracle

Facing stagnation and mass emigration, Ireland charted a radical new course. The centerpiece was slashing its corporate tax rate to a simple, low 12.5%. This policy, combined with a skilled, English-speaking workforce, uncorked a torrent of foreign direct investment.

  • Growth: The "Celtic Tiger" economy saw an astonishing average annual GDP growth rate of 9.4% between 1995 and 2000.
  • Investment: Foreign-owned firms like Intel and Microsoft set up major operations, with foreign direct investment (FDI) inflows peaking at 20% of GDP in 2000.
  • Prosperity: Ireland was transformed from one of Europe's poorest nations to one of its wealthiest, with living standards surging from 66% of the EU average to 140% by 2004.

New Zealand's "Rogernomics"

In the 1980s and 90s, New Zealand was a basket case of high debt, high inflation, and stagnant, state-controlled industry. The response, dubbed "Rogernomics," was a blitz of deregulation.

  • The government floated its currency, eliminated agricultural subsidies, removed import licenses and price controls, and privatized dozens of state-owned enterprises, from airlines to banking.
  • This shock therapy broke the back of inflation and forced the economy to become competitive.

Scandinavia's 1990s Austerity

Even the welfare strongholds of Scandinavia were forced to reform after a severe economic crisis in the early 1990s. Sweden, for example, faced soaring unemployment and a banking crisis. Its response was not to tax more, but to reform its pension system, institute a public spending ceiling, break up state monopolies, and allow private competition in healthcare and education. The results: after 20 years of no net private-sector job creation, private employment began growing by over 1% annually, and median disposable income grew four times faster after 1995 than it had in the previous two decades.

The formula was consistent and clear: less regulation, a controlled welfare state, and policies that incentivized work spurred investment and boosted consumption.

The European Straitjacket: Why Reform Is Now Impossible

Today, however, such nimble, nation-specific reforms are nearly impossible for members of the European Union. With Brussels "above it all," a monolithic, unelected bureaucracy dictates regulatory, energy, and economic policy, making vital change "way more hard to pass" at the national level.

  • Nations are no longer free to implement the very pro-growth, deregulatory policies that worked in the 1990s.
  • They cannot meaningfully lower corporate taxes to compete with Ireland without facing sanction, nor can they deregulate their industries without violating thousands of pages of EU directives, especially those related to "green objectives."
  • This rigid, one-size-fits-all model, incapable of adapting to global competition or internal demographic crises, has doomed the bloc to stagnation.

Like the British Empire and the Soviet Union before it—empires everyone thought would last centuries—the EU's inability to reform will inevitably lead it to the garbage bin of history.

Disclaimer

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Photo by Christian Wiediger / Unsplash.