Some surprisingly strong tax numbers

The story of Britain’s public finances in recent months is pretty well known by most people, I think. Borrowing is falling, but it is not falling as quickly as it should be, and appears to be heading for a significant overshoot this year. So much, so familiar; if you wanted to write an epitaph for George Osborne’s chancellorship, you could do a lot worse than that. Overshoots and missed borrowing targets have been the narrative since 2010.

 

Assessing how much of an overshoot this year, and in future years, is what the Office for Budget Responsibility is currently occupied with. It would be difficult to envy the OBR its task, which will require it to peer into the economic shape of Britain’s post-Brexit future. More on this, I hope, before Philip Hammond’s first autumn statement on 23 November. In his speech to the Conservative conference on 3 October, he confirmed that he would no longer be targeting a budget surplus by 2020.

 

There is another story, however, buried in the figures. It is that some tax streams have been very strong indeed in recent months, surprisingly so. Whether this is just happenstance, or the curse of Osborne – as soon as he is out of the way, tax receipts start performing – can be debated. On the face of it, though, at the very least this is welcome for Hammond, amidst all the other challenges he faces.

 

There are three standouts in the official tax numbers for recent months. The first is the strength of corporation tax receipts, which in August alone were 12.1% up on a year earlier. The second notable figures are the very healthy self-assessment numbers for this summer. Taking July and August together, self assessment receipts were up by a hefty 10.2% on a year earlier. The third area of surprising robustness is what the official statisticians call compulsory social contributions, but which most people know as national insurance contributions. In August, these were up by 8.2% on a year earlier, while for the first five months of the fiscal year (April to August), they showed a rise of 7.8%.

 

All three appear to defy the underlying drivers of these tax streams. Corporation tax receipts are strong at a time when company profits, while on the rise, have not been racing away. Self-assessment receipts are up, in spite of generally subdued growth in household incomes. Even more remarkable on this score are the numbers for NICs. Normally, growth in average earnings of 2% or so would combine with employment growth of something similar to produce an annual rise in receipts from NICs of 4% or 5%. The fact that they are rising at nearly double that rate is striking.

 

So what does all this mean? Will the strength of these receipts allow Hammond to defy expectations and announce better deficit numbers in his autumn statement than expected? Does the strength of revenues tell us that the economy is in an even healthier state post-Brexit than has been suggested?

 

Disappointingly, I am afraid it is not yet time to hang out the bunting. The OBR has also been digging into the figures. And, while it notes that some tax streams have been stronger than it expected – it singled out corporation tax in particular – others are underperforming. So, while corporation tax is up strongly, stamp duty receipts are struggling relative to expectations. They were up 10% year-on-year in the April to August period, when they should have been increasing by 19%. They have been hit, according to the OBR, by the introduction of a 3% surcharge on second home purchases in April; meanwhile, it finds that ‘uncertainty around the referendum result also seems to have reduced receipts growth, with falls in receipts from top-end residential and commercial transactions, particularly in London’.

 

More importantly, while self-assessment did well over the summer, PAYE receipts have been marginally underperforming. They tell better the story of subdued growth in earnings. The story on NICs is, additionally, not quite as good as it looks. Most people will have long forgotten the 2013 Budget but one of the measures it included was an end to the NICs contracting out rebate from April 2016. These slow-burn measures can be quite useful; this one was expected to boost receipts from NICs by £5bn in 2016/17. Their strength mainly reflects that.

 

What do tax receipts tell us about the referendum? The buoyancy of the government’s income from corporation tax tells us, at the margin, that businesses were not persuaded by the referendum result to take an immediately gloomier view on future profits. But the OBR is not prepared to concede too much on that, saying ‘much of the strength related to liabilities from previous years, making it difficult to infer any referendum related effect’.

 

 

The story of the deficit slippage of recent years is one of underperforming tax revenues, not missed spending targets. Despite one or two glimmers in the latest tax revenue figures, it is unfortunately much too soon to say that story is over. If the economy is indeed weakened by Brexit in coming months, it will have further to run.

 

Tax, meanwhile, will continue to occupy the centre of the political battleground. We have just had a Labour party conference in Liverpool in which the shadow chancellor and leader – John McDonnell and Jeremy Corbyn – have talked of a new and even more aggressive clampdown on tax avoidance, as well as higher taxes on business and the highly paid. Business does not appear to be in line for too many gifts from Hammond in his autumn statement. It seems he has rejected Osborne’s last act in office, which was to signal a further cut in corporation tax to 15% to maintain Britain’s appeal for inward investors once outside the EU. We can be fairly sure, however, that the new chancellor will not be aiming to soak business or the rich when he makes his announcements. And for that he will be attacked by his political opponents.