How the government spends your taxes

In a bid to help the British public better understand how the government collects and spends the taxes it gathers, chancellor George Osborne plans to introduce 'personal tax statements' to be sent out each year, to show us how our hard-earned money was spent.

The idea behind this is simple: taxpayers have an absolute right to know how our money is being spent.

Also, when we see how much is spent on, say, health, education, pensions and defence, this will help us to appreciate the financial pressures HM Treasury is under.

Taxing times
In this tax year, the government aims to collect £591.5 billion in taxes and other revenues. With around 49 million adults in Britain, this averages out at £12,071 per adult in 2012/13.

Then again, as I often remark, "averages invite comparisons". Thus, what we each contribute to the tax take varies widely, depending on our personal circumstances. Nevertheless, this average gives us a vague idea of how much we each contribute in taxes: over £1,000 per adult per month.

Of course, our tax system is chaotically complicated. Incredibly, the 2011/12 edition of tax bible Tolley's Tax Guide stretches to 11,520 pages, which is about 10 times the length of Tolstoy's masterpiece War and Peace.

• Four million to pay top tax rates

Your personal tax statement
Let's crack on by finding out from where the government gets its taxes and how these average out for each British adult. Take a look at this table, which I compiled from the latest report from independent forecaster the Office for Budget Responsibility (OBR):

Source: OBR

In the above table, I've divided each tax equally between all 49 million British adults and then shown what percentage each tax contributes to the total.

Taxing workers, businesses, drivers and vices
As you can see, income tax is the biggest earner, bringing in £3,159 per adult, which is more than a quarter (26%) of the total tax take. Next are NICs, which come to £2,155 each, another 18% of the total. Third is VAT, which averages to £2,082 per head and adds another 17%.

Thus, these three top taxes - income tax, NICs and VAT - account for more than three-fifths (61%) of the total tax take. Overall, they amount to £7,396 for every British adult.

British businesses pay nearly the equivalent of £1,449 per head, made up of £914 in corporation tax and £535 in business rates, or 12% of the total.

Also, drivers get taxed pretty heavily, paying over £557 per adult in fuel duties and another £120 in VED ('road tax'), totalling £677 a head, or nearly 6%. Households chip in £600 a head in council tax (£537) and TV Licence fees (£63) another 5%.

Lastly, drinkers and smokers also pay their share of taxes, with total duties on tobacco and alcohol reaching £416 per adult (more than 3%).

Your personal spending statement
We've seen where our taxes are raised, but where are they spent? Here's the answer:

Source: OBR

The first thing to note is that government spending far outstrips taxes. Indeed, this budget deficit will exceed £91 billion this year, thanks to £683 billion of spending. Spread across all 49 million British adults, total spending works out at £13,939 per head.

• Tax relief cap 'will hit donations'

Your £1,867 overspend
Overall, the government will spend £1,867 more per adult than it will collect in taxes this year. In effect, this £1,867 is your 'share' of the increase in the UK's debt in 2012/13.

Britain's biggest bill is the £4,224 a head it will cost this year to pay welfare benefits such as pensions, housing benefits, unemployment benefits, disability benefits, child benefit and tax credits. These welfare payments account for three-tenths (30%) of total government spending.

Running the National Health Service and other healthcare spending averages out at £2,653 per adult, or nearly a fifth (19%) of total spending. Education also has a big budget, accounting for another £1,857, or over 13% of the total.

These three departments - welfare, health and education - total £8,735 per adult, which is heading for two-thirds (63%) of total government spending.

Thanks to more than £1 trillion of public borrowing, debt interest accounts for another £939 per head, which is the price we pay today for our country living beyond its means for decades.

Culture, sport and international development (overseas aid) amount to £878 per adult, while defence costs another £796. Personal social services (home helps and social support for the vulnerable) costs £673 a head, while public order and safety (including the police) costs £653 an adult.

Our three remaining big bills are transport (£449 a head), housing and environment (£429) and industry, agriculture, employment and training (£388).

• Union hits out at tax credit cuts

Our taxing problem
What this exercise plainly shows is that government spending vastly exceeds its revenue. What's more, this spending gap will shrink but still remain for at least the next five years.

Indeed, the scale of the problem is so big that this year's budget deficit (£91 billion) is exactly equal to the education budget (also £91 billion). In other words, we could fill this fiscal hole at a stroke by cancelling all spending on educating British children and adults. Of course, this would cause our society to break down almost overnight.

In short, we have no option but to grit our teeth, stiffen our upper lips, summon our British resolve and await the return of better times.

• Check out our monthly budget calculator
• Four million to pay top tax rates
• Tax relief cap 'will hit donations'