A hole in the public finances

Government borrowing has risen as sluggish wage growth weighs on tax receipts.

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.

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.

Recommended

Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

The Energy Price Guarantee will now be extended, but how much will your gas and electricity cost you in 2023?
9 Dec 2022
UK house prices see their biggest fall since 2008
House prices

UK house prices see their biggest fall since 2008

Halifax’s latest house price index shows UK house prices fell by 2.3% in November
7 Dec 2022
Which house-price index is the best?
Property

Which house-price index is the best?

Britain is obsessed with house prices, and we have at least four house-price indices to choose from to measure the rate of increase in the value of ou…
7 Dec 2022
What is a recession and how will it affect you?
UK Economy

What is a recession and how will it affect you?

The UK economy is heading towards a recession, according to economists. But what is a recession, and what does it mean for your money?
6 Dec 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
The pros and cons of smart meters – should you switch?
Personal finance

The pros and cons of smart meters – should you switch?

A smart meter can help you keep tabs on your energy usage, but is it better than a regular meter? We take a look at smart meters vs regular meters.
2 Dec 2022