George Osborne’s plan to radically lower the level of government borrowing by the end of this tax year looks likely to miss its target, even though last month saw an increase in income tax receipts.
The Office for National Statistics has released its last report ahead of the upcoming March budget. The ONS stated that income tax receipts had gone up by around 4.7% more than they did at the same time last year, which contributed to a £11.2bn surplus in January. January is historically a good month for income tax receipts as people look to balance their books after the spending-heavy Christmas period.
However, this increase in tax receipts has not allowed the Chancellor to meet the City’s forecasts of a £12.3bn surplus. This means that in order to meet his targeted surplus, he will now have to borrow no more than £7bn for the rest of this tax year; £7bn is less than half of what the Chancellor borrowed in the same two months of 2015.
Mr Osborne has continually warned that there are a “cocktail of threats” facing the UK due to the current state of the global economy and due to the ever likelier fact that the UK’s economic forecast will be downgraded. He has stated that this makes his argument, that the UK’s budget has to be balanced by 2020, even more compelling.
The chief UK economist at IHS Global Insight, Howard Archer, has stated that the Chancellor will most likely have to make the red-faced announcement that he will miss his target when he makes his budget speech on 16 March.
Mr Archer also went on to say that the future also looks concerning due to the fact that economic growth is slowing down and earnings are yet to rise significantly. He believes this to be a problem because it is likely to damage the amount of money that the Treasury will be able to raise through income tax.
Mr Archer said:
“The odds still look stacked against Chancellor George Osborne meeting his fiscal targets for 2015/16 that were contained in November’s Autumn Statement.”
“George Osborne will likely be in the uncomfortable position of having to admit that he will miss his 2015/16 fiscal targets in the budget.”
In recent weeks George Osborne has been called upon by the OECD to slow down his plan to reduce the budgetary deficit in order to free up more money to pay for investment in infrastructure projects. The think tank, which is based in Paris, said that the Treasury had enough “fiscal space” to be able to raise spending and stimulate the creation of higher level jobs and more growth.
The Office for National Statistics stated that payments related to income tax have gone up by £6.5bn to a total of £143.7bn. Payments related to National Insurance have also gone up by £3.1bn (3.5%) to a new total of £91.8bn. There has also been a £3.8bn increase in VAT receipts, which now total £108.2bn.
This government cut corporation tax by 8% to 20% back in 2010 and is scheduled to fall to just 18%. However, the total received this year still increased by £1.2bn (3%) to a total of £40.5bn.
Another side to the government’s cost cutting policy has been the reduction of government borrowing rates. This means that despite total debt increasing to £1.58tn, which is equal to 82.8% of GDP, the amount that the government now pays in interest has been cut by £1.6bn (9.4%) to a total of £15.6bn.
The amount that the government spends has also been cut. Departmental spending has only gone up by 0.9% and welfare spending has only been increased by 0.7%.
An economist from Capital Economics, Paul Hollingsworth, has said that the increase in tax receipts will have come as a boon to Osborne who is facing an increasingly difficult battle to keep his economic plans on track.
In December 2015, it was revealed that the total government deficit was only £7.5bn, having fallen from £10.1bn at the same time last year. Whilst this demonstrates downward movement in the level of the deficit, it is not happening at the rate that was previously predicted by the ONS.
George Osborne commented saying:
“Today’s figures show that while the deficit is falling, there’s more to do.
“We’ve learned there is no shortcut to fixing the public finances and when confronted with global economic turbulence, we can’t let up in taking the action necessary to build a resilient economy and deliver economic security for working people.
“With warnings of a weaker outlook for the economy and the challenges for future tax receipts this could bring, we cannot be complacent in thinking the job is done.”