George Osborne is heading for a borrowing undershoot this year, which would break the recent pattern. He is, however, unlikely to use it to finance a giveaway in his 21 March budget, despite political pressure on him to do so. He will argue that the priority continues to be to get the deficit down.
Is the government’s fiscal strategy on course or way off beam? And what clues do we have in the statistics about the effectiveness of the 50p top tax rate in raising revenue? Thanks to the latest numbers for the public finances, we have moved a lot closer to being able to answer both questions.
January is a key month for the public finances, including as it does a bulge in income tax payments (all those self-assessment returns) and corporation tax revenues. If January is strong, HM Treasury can relax a little.
Fiscal strategy
January was indeed strong, with a budget surplus (negative net borrowing in the jargon) of £7.8bn, £1.5bn better than the markets expected and a £2.5bn improvement on January 2011. Cumulative borrowing for the first ten months of the fiscal year, £93.5bn, compares with £109.1bn for the corresponding period of 2010/11. The strength of the January numbers means that it will be very hard for George Osborne to miss his borrowing targets for this year. True, that target was revised up from £122bn to £127bn by the Office for Budget Responsibility (OBR) in the November Autumn Statement. It now looks, however, as if borrowing will undershoot both the £127bn November projection and the earlier £122bn. Indeed, it may come close to the forecast of a £116bn deficit made by the interim OBR as long ago as the emergency budget of June 2010, way back when the coalition was in its infancy. That, given how much water has passed under the bridge since then, including mostly disappointing news on economic growth, would be hugely encouraging. HM Treasury officials used to say that their aim was to decouple the borrowing forecasts from economic growth. In other words, weak growth would not necessarily blow the deficit reduction strategy off course. The latest numbers suggest they may have succeeded. They also cast doubts on the OBR’s latest longer-term projections for the deficit. Labour’s attack on the government’s management of the public finances has been based on a cumulative upward revision of borrowing by the OBR of £158bn since that first June 2010 forecast. If the first year’s upward revision turns out to have been unnecessary, those for future years may be too.
Incidentally, I noted last month that official figures showed Britain’s public debt had risen above £1 trillion for the first time in December. Well, thanks to January’s budget surplus and some revisions to the numbers for earlier months, the debt has dipped below £1 trillion again. At £988.7bn, 63% of gross domestic product, it is still very high and likely to be back above £1 trillion before the end of the current fiscal year. Maybe, however, we should be grateful for small mercies. There is, of course, a long way to go before the public finances can be said to be remotely healthy. It was always the case, however, that it was important to be moving in the right direction and preferably at a faster pace than expected. It is early days but the evidence is that this is happening.
Do not expect, however, that the prospect of an undershoot will lead to a Budget giveaway. Osborne will use the OBR’s caution about borrowing in later years, as well as the recent threat of a sovereign debt downgrade by Moody’s the ratings agency, to argue for caution. There may be some modest sweeteners in the budget but the broad thrust of policy will not change. The Chancellor will be happy to bank any undershoot in borrowing, if only to steer the agencies away from their downgrade threat.
The 50p rate
What about that other evidence we were looking for in the public finance numbers? Are tax receipts rising at a rate that would suggest the government is enjoying a revenue bonanza from the 50p top tax rate introduced in April 2010 on incomes above £150,000?
After the outcry over top people’s pay and City bonuses, this has become a hot issue. There is not much point in a tax that does not bring in any net revenue, though the politics of removing it look tricky. HMRC officials are currently engaged in an exercise, based on self-assessment returns, of assessing how much the 50p rate is bringing in. The Institute for Fiscal Studies suggests it will fall short of the £3bn a year projected by the Treasury when the tax was introduced and on some assumptions could be a net revenue loser.
So what do we know? On the basis of the January figures, the effect of the 50p rate on revenues looks distinctly underwhelming. Self-assessment and CGT receipts in January were up by just 1.5% on a year earlier. There are some caveats. An industrial dispute at HMRC meant that the self-assessment deadline was extended by a couple of days. The initial stab by the official statisticians at January receipts is often subject to significant revision. Most City bonuses are received in February, which could lead to a secondary boost in revenues (though many these days are deferred or in the form of shares).
On the face of it, however, it looks hard to prove that the 50p tax rate is having a decisive effect on revenues. Indeed, it is hard to detect a positive effect at all. The HMRC will report in time for the March Budget and the Chancellor has promised to respond. My guess is that the politics dictates that he will find an elegant way of kicking it into touch. We shall see.
David Smith, Economics Editor, The Sunday Times
