Buoyant tax revenues give Osborne room to manoeuvre

The UK’s public finances were in much better shape in January than expected. There was a current budget surplus of £8.5bn and public sector net borrowing was -£3.7bn.

The UK’s public finances were in much better shape in January than expected. There was a current budget surplus of £8.5 billion (compared to £4.1 billion in January 2010) and public sector net borrowing (PSNB) was -£3.7 billion (£1.3 billion a year ago).

January is an important month for tax revenues, because it is the deadline for a range of tax payments and a surplus is normally recorded. As a result of these figures, the cumulated deficit on the current budget over the first ten months of the 2010-11 financial year is £85 billion and net borrowing is £113 billion.


Two things follow from these figures.

First, the strength of revenues – for January and for the financial year to date – do not appear to be consistent with the weak fourth quarter GDP numbers (showing a 0.5 per cent decline).

There are lags from output growth to revenues, so care is needed, but a tentative conclusion would be that the public finances suggest the economy is doing a bit better than the GDP numbers suggest.

Second, if the Office for Budget Responsibility takes the higher level of revenues in 2010-11 as its starting point for the budget projections, then it will be revising down its estimates of deficits in future years. This will give the Chancellor a fair few billion pounds to play with on March 23rd.

He could choose to cut taxes, to spend a bit extra on a few pet projects, or to be ‘prudent’ and accept the lower path for the deficit; of course, if he chooses prudence (and the deficit remains on the new lower path), then he would be in a position to cut taxes or increase spending nearer the election.

9 Responses to “Buoyant tax revenues give Osborne room to manoeuvre”

  1. sean gittins

    RT @leftfootfwd: Buoyant tax revenues give Osborne room to manoeuvre: //bit.ly/ffgQqA writes @ippr's Tony Dolphin

  2. Hawkeye

    I’m not at all surprised that the revenues in January were higher than expected. As mentioned in the article, a number of tax payments are due in January including personal tax from the 2009/2010 tax year.

    I speak from personal knowledge that many people brought forward bonuses and dividends that would otherwise have been paid in the 10/11 tax year to be paid by March 2010. That was done to avoid the 50% tax rate which started in April 2010. The tax due on those payments (up to end-March 2010) would have been due in the January just gone.

    Thus to a certain degree, the larger revenues collected in Jan are due to people avoiding the 50% tax rate and so one should watch out for a) tax revenues collected during the 10/11 tax year to have been lower as a result (less PAYE/NI) and b) tax revenues collected in Jan 2012 to be less than expected as the bonuses/dividends that would have been paid in 10/11 were paid before that tax year started.

  3. william

    Note to Ed Balls.Banging on about cutting the deficit too fast, too soon in 2011 is not going to cut much ice with the electorate in 2014,when the tories will announce income tax cuts, and remind everybody of who was the architect of the financial mess.There needs to be a change of message and messager.

  4. Anon E Mouse

    William – Bang on. Can Labour supporters now please stop this “Double Dip Recession” nonsense and this business of cutting the deficit more slowly.

    It is quite obvious that to stop wasting money, (remember before the last election Labour stated they had found £11billion in waste) more quickly is desirable.

    To suggest otherwise is economically incompetent and makes Labour just look as if they’re in denial of the financial mess they’ve left this country in after government.

    Again.

  5. Kelvin John Edge

    RT @leftfootfwd: Buoyant tax revenues give Osborne room to manoeuvre: //bit.ly/ffgQqA writes @ippr's Tony Dolphin

  6. Ash

    Anon –

    “Can Labour supporters now please stop this “Double Dip Recession” nonsense and this business of cutting the deficit more slowly.

    It is quite obvious that to stop wasting money, (remember before the last election Labour stated they had found £11billion in waste) more quickly is desirable.”

    But even the Tories wouldn’t claim the deficit can be got rid of if you simply ‘stop wasting money’. They think that if you want to get rid of the deficit in four years, you also need to cut tens of billions of pounds of non-wasteful spending and raise taxes substantially.

    So there’s no contradiction at all between agreeing that we should ‘stop wasting money’ by lunchtime tomorrow, and denying that we should be seeking to eliminate the whole deficit in four years.

  7. Ash

    What I see in these figures is just a continuation of a pattern we’ve been seeing since early last year: the size of the deficit has been overestimated, and the ability of modest growth and tax rises to reduce it has been underestimated.

    This time last year we were being told the deficit was close to £180 billion; that figure was then revised downwards to £160-odd billion, then £150-odd billion, and now, without having seen much growth or made any drastic tax rises or spending cuts, it looks like it’s closer to £130 billion. The Tories have resolutely kept their finger on the panic button, but it looks more and more as if the gamble they’re taking is as needless as it is reckless.

    If these figures aren’t just a ‘blip’ – if tax revenues really are this much healthier than we thought – Labour should now be making the strongest possible case that the Tories’ spending cuts are based on a mixture of ideology and blind panic rather than a realistic asssessment of what’s needed to close the gap between spending and revenues in the medium term.

    I’d love to believe Osborne would use any ‘extra’ money to protect services rather than to cut taxes, but of course he won’t – especially since the Lib Dems will no doubt be pushing for larger, earlier rises in the tax theshold.

  8. Anon E Mouse

    Ash – No one is proposing cutting the deficit by tomorrow. The cuts only amount to taking us back to public spending of 2007 levels and I hardly remember the country being close to the doom monger scenario’s being spouted by Labour supporters on this fine blog.

    What’s going to happen is the cuts will come in 2012. The union dinosaurs, the only real funders of the Labour Party, will be on strike. Labour will become embroiled in it and people in Manchester for example will ask why public toilets are cut yet the council CEO is on £250k a year – double the Prime Minister’s wage.

    Images of Neil Kinnock and his “grotesque” Labour councillors will be repeated. The strikes will turn violent. The public will come down on the government’s side. They always do.

    It’s like the eighties all over again except Thatcher only talked about cuts whilst continuing to spend and this lot seem to mean it.

    As for protecting public services I cannot believe you didn’t see the way the incompetent NHS, with more management than frontline doctors and nurses, treated those elderly folk last week. Surely you don’t want to protect that do you?

  9. Ash

    Anon

    “The cuts only amount to taking us back to public spending of 2007 levels”

    Tory spin. From Channel 4 Fact Check: “that comparison masks what will actually happen to public services… much more of the spending will be on things like debt interest payments and pensions for the baby boomers. A more accurate measure would be central government spending on public services, which will fall to 1999/2000 levels by 2014/15.”

    “Thatcher only talked about cuts whilst continuing to spend and this lot seem to mean it.”

    Thatcher did make cuts; it’s just that she didn’t manage to bring the overall level of spending down. Just as example of how this works: if you cut unemployment benefits from £60 a week per person to £50, but unemployment goes from 1 million to 3 million, spending on unemployment benefits rises by about half a billion pounds a year. Doesn’t mean you didn’t cut unemployment benefits.

    “more management than frontline doctors and nurses”

    Myth. There are around ten times as many doctors and nurses in the NHS as there are managers (c. 105,000 doctors, 375,000 nurses, 45,000 managers). Managers and administrators together (if that’s what you mean) make up 11.7% of the NHS workforce – a lower proportion than the typical private company the Tories would hold up as a beacon of efficiency.

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