Slowing tax receipts mean no end to the deficit is in sight

Cormac Hollingsworth looks at how the fall in tax receipts will harm attempts to pay off the deficit.


Stalling tax receipts as a result of collapsing growth lay behind the Office of Budget Responsibility’s raising of the borrowing for this Parliament by well over £100 billion. The disappointing receipts numbers in today’s public borrowing figures point to real concerns of a permanent high deficit for the whole of this Parliament.

January is the most important month for receipts, and it’s the month that tells us the most about what’s going on about the economy.

Last year, as Labour’s support for the economy faded and the cuts began to kick in, there was a surprise pay-back of debt in January 2011. Then, receipts were growing at 8.4 per cent. This was a surprise as UK growth at that time had been estimated at only 1.5 per cent for 2010.

Since then, of course, 2010 growth has been revised upwards a whopping 0.6 per cent percentage points, more than the growth we’re expecting for 2012.

This year, because of lower growth, receipts are only growing at 4.7 per cent rate. But this hides some significant slowdown.

The problem for the government is receipts are just not rising fast enough to cut the deficit. Next year, the OBR is hoping that tax receipts rise by 3.2 per cent. If the economy this year is like it was last year, receipts may rise by only 1.8 per cent. That is a big problem.

VAT is the worst. Taking out the effect of the VAT tax rise, VAT receipts are only rising by 0.2 per cent year on year. By this time last year (only one month into the higher VAT rate), VAT receipts were rising at 15.7 per cent per year.

Next is income tax. Income Tax is almost double the size of the VAT tax-take, and it was very welcome that during the recovery in 2010 income tax receipts were growing at 10.5 per cent rate, this year, they only managed to rise at a 1.6 per cent rate. This is particularly bad because we’ve now got the January self-assessment receipts which make January the best month for this tax, almost double the receipts of other months.

Some comfort for those who believe that the economy has the capacity to expand faster, taxes from production continue to grow. This sector is still recovering from their complete collapse in 2009, and it’s good to see them still growing, receipts so far this year are up 6.4 per cent. However, the disappointment can’t be completely avoided here either– last year these receipts were growing at double that rate, 12.5 per cent.

See also:

CBI carry on tradition of alarmingly optimistic growth forecastsAlex Hern, February 13th 2012

Growth in jobs probably not enough to bring down unemploymentRichard Exell, February 8th 2012

Growth goes down, so what will happen to the deficit?Alex Hern, January 25th 2012

Memo to Osborne: Jobs and growth will cut the deficit. Please listenCormac Hollingsworth, January 17th 2012

Growth revision shows economic recovery is off trackTony Dolphin, January 9th 2012

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