UK’s borrowing decreases due to higher tax yields

25th November 2011

In this piece Blerina Uruci, an economist at Barclays Capital says: "Current receipts continued their recent strength despite the slowing economy. The increase in receipts compared with a year ago was a result of higher VAT and social contributions receipts, while taxes on income and wealth were weaker. Although higher tax receipts were to be expected given the rise in the VAT and national insurance rates, the strength is somewhat surprising given the worsening macroeconomic conditions."

This is not just a one-off. As these stats show, tax take in the UK economy is almost back to pre-recession highs: 2007/2008 was the peak year for tax receipts at £451bn. The next year the recession began to bite and the overall tax take dipped to £439bn and then £408bn. This year it has been back up to £447bn.

This also highlights the dilemma for governments. For every year that the Government only raises £408bn, and doesn't cut spending, it is left with a £43bn hole in the economy, even assuming it had balanced its books to start with. The graph on this site shows how quickly apparently manageable debt levels can spiral out of control when tax receipts fall. Debt levels were stable at around 35% of GDP until as recently as late 2007.

But where are the most important areas for the Government? The heavy-hitters in terms of tax revenues are income tax, national insurance and VAT at £153.5bn, £96.5bn and £83.2bn respectively. Corporation tax is a relatively lowly £42.1bn, though corporations will pay NIC as well. Fuel duties are an increasingly chunky part of Inland Revenue coffers at £27.2bn.

It is VAT and Corporation tax revenues that are hardest hit in a recession. VAT receipts have held up well recently because of the increase in rates from 17.5% to 20%, though stable retail sales and higher inflation have also contributed. Capital gains tax has also halved from its highs, but at £3.6bn, it is not a significant revenue generator for the government.

This year saw the first contribution from the bank payroll tax, which brought in an additional £3.6bn. An improvement in the banking sector represents another potential source of revenue for government. It not only means that any guarantees put in place will not need to be used, it also means that the government will be able to recoup some of its original financial outlay.

Similar patterns are seen in the Euro area, though tax receipts have generally not recovered to the same extent since the crisis.

This document outlines the impact of the Eurozone crisis on tax take in individual countries.

One of the key conclusions from this document is as follows: "Expenditure, in contrast, went up much more, by around four points of GDP. Furthermore, while the expenditure-to-GDP ratio increased significantly in almost all countries, the picture on the revenue side was much more contrasted: in about one fourth of countries, the drop of revenue was significant, approaching 2 % of GDP or more, whereas more than one third of countries actually increased revenues, as a share of GDP."

In other words, tax revenues are more stable than spending. Excessive spending has contributed significantly more to the current debt crisis than a weakness in tax take as a result of recessions. This is why cutting spending has been the priority for governments and some have been willing to take a risk on growth to achieve it.

More on Mindful Money

What Nick Robinson didn’t mention on ‘Your Money and How They Spend It'

Could Germany be forced to support QE after failed bond auction?

Eurozone Crisis: EFSF 'falling well short of its billing'

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1 thought on “UK’s borrowing decreases due to higher tax yields”

  1. David Lilley says:

    The interesting thing about George’s speech is the introduction of the word “competitiveness” whilst his many other tentative solutions to the EZ crisis have considered the problem to be one of “liquidity”
     
    Mervin King was the first to press the case that it was a competitiveness issue and not a liquidity issue. You have to properly identify the problem before you can solve it.
     
    George would do well to talk to Jim Rogers, his previous associate, who highlighted the ageing population and debt in the west several years ago and made his “position” the rising east.
     
    The big difference between liquidity and competitiveness is that the former requires a temporary loan whilst the latter requires semi-permanent benefits in the form of loan after loan followed by haicut after haircut.
     
    Everything done so far, with one exception, has been good firefighting and not simply kicking the can down the road. The exception was to not monitor Greek management of the first Greek bailout. And this is the first failure of the IMF in its history.
     
    I have previously posted solutions that have been an extention of the first G20, which introduced “coordinated interest rate cuts” and prevented the Great Recession becoming a Great Depression. The extention was to do the obvious next step and have coordinated QE and to some extent this has happenned.
     
    But there is another less ambitious but equally obvious solution. Forget about “growth v austerity” and just take the lead from the UK. The UK had the worst combined debt in the world and still has (personal + corporate + sovereign) but it could put together the phrase “we have a credible deficit reduction plan”. The result has been a 25% deficit reduction, 75% of which has come from tax rises, ultra low bond yields reducing the cost of debt servicing, protection of frontline services and an increase in government spending prior to the competitiveness reforms kicking in.
     
    “Growth.”
     
    If the Keynsien multiplier worked we would not have had mass unemployment in the west prior to the debt crisis. We would have just rolled out the multipier instead of saving it for a rainy day. It is as nonesensical as reducing the retirement age in France.
     
    “Austerity.”
     
    Living within your means rather than living way beyond your means is not austerity. It is only relative austerity compared to living on a sub that you knew you would have to do without one day. Get competitive, your competitors work longer and harder. Get that massive corrupt and inefficient state off your back as that is your biggest handicap to winning the race.
     
    With all respect to George.

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