Rising income tax receipts ensured Britain enjoyed the biggest boost to its public finances for seven years in January, it emerged on Friday, capping a week of good economic news for the coalition in the countdown to the general election.
With inflation falling to a low, real wages rising for the fourth consecutive month and unemployment at a six-year low, George Osborne is hoping voters finally begin to feel their personal finances are improving and give the Conservatives the credit at the ballot box.
Higher income tax receipts were driven by self-assessment payments from top rate taxpayers who had deferred income to take advantage of the end of the 50p tax rate. They took the January surplus to £8.8bn against last year’s £6.5bn, putting the government on track to meet its full-year borrowing target.
Rob Wood, UK economist at Berenberg Bank, said it was clear that “solid growth is feeding through to taxes”.
The chancellor will now have more room to manoeuvre for his Budget on March 18 as borrowing starts to fall after months of little improvement because of weak tax receipts.
Elizabeth Martins, economist at HSBC, said the data would “open the door” to pre-election giveaways. Chris Williamson, chief economist at Markit, the survey data company, said it was clear the recovery in incomes was “starting to have a material impact” on the deficit reduction plans.
For the financial year to date, the government has borrowed £74bn to cover the gap between income and spending, £6bn less than at the same time last year.
This means that as long as the government borrows the same amount as it did in February and March last year, it will meet its Autumn Statement forecasts that borrowing will total £91.3bn for the 2014-15 financial year, £6bn lower than the previous year.
Soumaya Keynes, research economist at think-tank the Institute for Fiscal Studies, said: “Public finances are now more likely to get better than worse this year compared to last, with growth in corporation tax and VAT receipts already much better than the [Office for Budgetary Responsibility’s] full-year forecasts.”
However, she cautioned that Friday’s data “while relatively good news for the government, are not enough to change the scale of the fiscal tightening ahead”.
Even if borrowing falls in line with the OBR’s forecasts it would be the second-smallest year-on-year reduction since the peak after the financial crisis and about half the decline predicted last March — even though it has been the strongest year for growth in gross domestic product.
Low inflation also means the government is having to pay less to finance its overall debt, which still stands at 79.6 per cent of GDP.
Mr Osborne said it had been a week of economic milestones, “but in an uncertain world economy all of this progress will be at risk unless we carry on working through the plan that is delivering stability and rising living standards”.
Chris Leslie, Labour’s shadow chief secretary to the Treasury, stressed that over the course of this parliament the reduction in borrowing had been far slower than forecast. Mr Osborne had “broken his promise to balance the books by this year”, he said.
“His failure on the deficit is because falling living standards over the past five years have led to tax revenues falling short.”
January nearly always sees a surplus because self-assessment income and corporate and capital gains taxes are all payable by the end of the month.
But the coffers were also bolstered by the bounce in self-assessment income tax receipts, up 15.6 per cent over the previous year.
This £1.6bn rise was less than the £3bn expected by the OBR, but because January 31 — the final date for tax return filing — fell on a Saturday, some receipts are likely to come in February’s numbers.
In the spring of 2013, some top-rate taxpayers moved their income from the 2012-13 tax year to the 2013-14 tax year to take advantage of the cut from 50p to 45p.
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