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This blog was originally published on taxexpenditures.org on 15 December 2025 here, and is reproduced with kind permission.
With growing fiscal stress and record-high debt levels, governments worldwide are facing increasing pressure to mobilise additional resources to fund their growth and development strategies. An avenue often neglected regards the reform of tax expenditures. According to the Global Tax Expenditures Database (GTED), global revenue forgone from tax expenditures (TEs) lies around 3.7% of GDP and 23% of tax revenue, on average.
Governments use TEs to pursue different policy objectives such as attracting investment, creating employment and greening the economy. Yet, when poorly designed, they can be too costly, ineffective and might trigger undesired effects.
One thing is clear. TEs deserve far more scrutiny regarding both their fiscal cost and their effectiveness.
TE has so far eluded the standardization seen in other areas of fiscal reporting, such as the IMF’s government finance statistics and international public sector accounting standards. While generally defined as a deviation from the benchmark tax system, how the benchmark is defined can vary considerably from country to country.
In the UK, HM Treasury (the finance ministry) does not use an explicit benchmark to identify TEs. Instead, it prefers the term “tax reliefs”, classified as structural or non-structural using broad definitions. Structural reliefs are integral to the design of the tax system, while non-structural reliefs pursue specific social or economic objectives.
While pragmatic, this approach is not transparent about the judgements involved in TE reporting. Many provisions, such as capital allowances for businesses, have both structural and non-structural elements. Tax measures can also be classified in ways that are hard to understand. Until 2024, private school fees were exempt from VAT and this policy was reported as a structural relief without much explanation.
The UK has created an extensive system of tax reliefs. The National Audit Office has previously reported the existence of 1,190 reliefs. The December 2024 official statistics provides information on a smaller set of 580 tax reliefs, of which 344 were classified as non-structural. The headline cost is based on adding up just 107 of these non-structural reliefs.
Even without being comprehensive, revenues foregone were estimated at GBP 207 billion, equivalent to around 7.6% of GDP in 2023-24. Adding in measures with “single-year costings” that are not updated annually would add further GBP 19 billion, even without considering subnational tax reliefs. So while numbers look big, they probably underestimate the full cost to government. New statistics are due to be published soon, so the figures will evolve with revised policies and assumptions, but the general picture will not have changed significantly from last year.
Controlling TEs is not simple. Their fiscal cost grows with the tax base and the size of the economy. For example, the cost of exempting the sales of primary residences from capital gains tax increases as house prices rise in real terms, even if the underlying policy is unchanged.
Moreover, whereas most direct spending is subject to transparent budget caps and appropriation limits, this is not the case for TEs. Countries that have tried to impose fixed aggregate limits for the number (e.g. France) or value (e.g. Korea) of TEs have found these hard to implement in practice.
Controlling the cost of existing TEs requires changes to the underlying policy, even if this is not easy. In the UK, successive governments have faced both technical and political challenges reforming major TEs, including pensions tax, personal tax credits and inheritance tax on agricultural property. The 2025 Budget proposed some notable changes, including limiting relief on salary sacrifice contributions to private pensions. However, it offered no signs that a more systematic review of tax reliefs is on the cards.
A key area for TE reform is evaluation, where many countries invest too little. This is also the case in the UK. According to a 2024 report by the National Audit Office (NAO), only 36 of the 341 identified tax reliefs have been evaluated since 2015. More systematic evaluation would strengthen policy control and oversight, and help build a public case for reform.
The Labour Government has talked about “fixing the foundations” of the UK economy. It could do worse than apply the same slogan to the management of TEs.
In September 2025, ODI Global and the Council on Economic Policies (CEP) hosted a joint event to discuss TE policy making from both a United Kingdom and an international perspective.
Based on the discussions, and CEP’s newly published TE Country Report for the UK, we can propose concrete measures for the UK to get the basics right:
A more ambitious goal is to turn the annual statistics on tax reliefs into a “TE budget” with information that is more closely aligned to the timetables and presentation of budget forecasts and policy decisions. This would be charting relatively new ground among OECD countries and would bring the UK to the forefront of efforts to improve TE management.
The event organized in September highlighted that the challenges that lower income countries face regarding TE analysis are not too different from high income countries, including the UK.
The IMF has called for countries to spend smarter. Our plea to governments is not to overlook policies delivered through the tax system, since TE reform has significant potential to free up fiscal space and better align tax systems with governments growth and development strategies.
To find out more, please take a look at the growing set of research and tools available in the Tax Expenditures Lab and the Centre for Tax Analysis in Developing Countries.
Published on: 19th December 2025
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