The government's plan to reduce its annual overspend (the deficit) this tax year isn't going to plan. The Treasury borrowed £11.6bn in August, £0.7bn higher than last year.
Borrowing in the first five months of the 2014/15 fiscal year came in at £45.4bn, 6% higher than last year. Yet the plan was for borrowing to fall by 12% this year, according to projections by the Office for Budget Responsibility (OBR).
What the commentators said
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% (adjusted for inflation) since January 2013.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But "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% of this sum has materialised so far.
You can chalk this up to the fact that wage growth has been extremely weak, even though the jobs market is booming, said Sarah O'Connor in the Financial Times. Average weekly earnings have barely risen this year, and most of the job growth seen recently has been in low-skill, low-paid sectors.
With the personal allowance now at £10,000, tempering the tax burden on low earners, "the fiscal dividend from economic recovery is proving to be smaller than the OBR expected", said Citigroup's Michael Saunders.
Note too, said The Economist, that when wages don't keep up with inflation, workers are dragged into lower tax brackets "reverse fiscal drag". All 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 it hardly helps that even City pay packets have been subdued of late.
But the trend should improve, said Capital Economics. Now that there is less slack in the labour market, earnings should rise (as companies compete for a smaller pool of workers).
Income tax receipts will receive an extra boost as self-assessment returns for 2013-14 arrive in January: many high earners delayed bonus payments until the top rate of tax had been cut to 45%. So it's too early to assume the deficit-reduction plans have been derailed again.
