The government’s plan to reduce the deficit this tax year is not going to plan. The treasury borrowed £11.6bn in August, which is £0.7bn higher than last year. Borrowing in the first five months of the 2014/15 financial year came in at £45.4bn, 6% higher than last year. Yet the plan was for borrowing to fall by 12% this year.
The spending cuts are progressing “more or less as planned”, said The Economist, it’s the tax raising side that’s been disappointing. Rising consumption has boosted VAT, while the housing bubble has seen stamp duty jump by an astonishing 71% since January 2013. However the big problem is income tax, which accounts for around 25% of revenue. This year the Treasury expects around £11bn more in income tax, thanks to the strong recovery. But only around 10% has materialised so far.
This could be explained by the fact that wage growth has been extremely weak, even though the jobs market is booming. Average weekly earnings have barely risen this year, and most of the job growth seen recently has been in low-skill, low-paid sectors.
When wages don’t keep up with inflation, workers are dragged into lower tax brackets, all of this accentuates a long running trend, the Treasury’s growing reliance on high earners. The top 1% produced 28% of all income taxes last year, up from 11% in 1979. So as City pay packets have been not seen any growth to talk of, this hasn’t exactly helped the situation.
But the trend should improve, said Capital Economics. Now that there is less slack in the labour market, earnings should rise. Income tax receipts will receive an extra boost as self-assessment returns for 2013-2014 arrive in January.