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Britain's tax take comes up short

31 March 2014   (0 Comments)
Posted by: Authors: Chris Giles and Vanessa Houlder
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Authors: Chris Giles and Vanessa Houlder

Britain’s public finances are experiencing an economic recovery that is unusually light in revenues, with Financial Times calculations showing less tax than forecast flowing into the exchequer.

With the country starting a new tax year on April 6, George Osborne will on Monday stress what he calls "the biggest cuts to personal and business taxes in a generation”.

However, revenues from net tax increases imposed by the coalition government since 2010 are not helping to close the deficit as rapidly as expected. Disappointing income levels suggest either that taxes have become more difficult to collect after the financial crisis or that the Office for Budget Responsibility and the Treasury have been persistently too optimistic about the likely receipts.

In a speech to companies in Essex on Monday, the chancellor will highlight the rise in income tax personal allowance to £10,000 in 2014-15 alongside a cut in the corporation tax rate to 21 per cent.

Extracts from the speech released over the weekend did not refer to tax increases also coming in April. These include large reductions in the generosity of tax relief for pension contributions, new restrictions to combat alleged tax avoidance in limited liability partnerships and less generous capital gains tax rules on second homes.

Treasury figures show a net £2bn tax cut in 2014-15, which will be reversed in 2015-16. Both changes are small compared with the coalition’s estimate that it has imposed £23bn a year net tax increases since the last election.

Despite all the efforts to raise more revenues through taxation, FT figures show that the OBR has had to rein back its optimism on tax proceeds almost every year since starting work in 2010.

The OBR originally hoped the tax system would collect revenues worth 38.8 per cent of national income in the coming 2014-15 tax year, a figure that has progressively been revised down to 37 per cent.

These downward revisions do not reflect any weakness in the economy – as they are proportional to national income – but disappointing revenue collection.

Weaknesses in corporation tax receipts from the financial sector, declining North Sea revenues and low pay growth hitting income tax revenues are all exacerbating the difficulties of bringing down borrowing.

Four years into the economic recovery, and despite Mr Osborne’s extensive tax increases, the OBR now expects the exchequer to collect 37 per cent of national income in revenues in 2014-15, no higher than the figure in 2010-11.

In the recovery from the 1990s recession, tax rises led to a surge in revenues, raising revenues from 34.8 per cent of national income in 1993-94 to 37 per cent in 1997-98.

The chancellor is choosing to highlight the specific tax cuts coming in April rather than his full record or the disappointing revenues. On top of the personal allowance increase and fall in the corporate tax rate, the annual corporate investment allowance, an incentive to encourage companies to invest in plant and machinery, will increase from £250,000 to £500,000 from April 1 until December 2015.

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