{"id":24442,"date":"2014-03-20T07:51:48","date_gmt":"2014-03-20T07:51:48","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=24442"},"modified":"2014-03-20T07:51:49","modified_gmt":"2014-03-20T07:51:49","slug":"the-budget-detail-no-real-wage-growth-increased-personal-borrowing-and-tax-increases-are-coming-your-way","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2014\/03\/20\/the-budget-detail-no-real-wage-growth-increased-personal-borrowing-and-tax-increases-are-coming-your-way\/","title":{"rendered":"The budget detail: no real wage growth, increased personal borrowing and tax increases are coming your way"},"content":{"rendered":"

I can remember \u00a0when my post-budget reading used to be all about changes in specific tax laws. I still do that, \u00a0but I admit that I am more interested in the impact \u00a0of taxes on the economy as a whole these days. That's an issue many overlook. As a result \u00a0I have been looking at \u00a0Part D \u00a0of the budget report this morning<\/a>, \u00a0which is the bit that looks at economic forecasts and what it says is significant \u00a0in my opinion.<\/p>\n

First, this is the overall outlook:<\/p>\n

\"Screen<\/a><\/p>\n

First, \u00a0the real GDP line\u00a0suggests that there will be growth in the economy. This, is, of course conjecture. \u00a0Given that almost all the growth of we are seeing at present is the result of a housing bubble, how long can this be expected to last?<\/p>\n

Second, \u00a0by comparing \u00a0wage and salary growth with the retail price index (RPI), \u00a0which for ordinary people is by far the most important measure of inflation, \u00a0it \u00a0is apparent that the government thinks that \u00a0wage \u00a0growth will very slightly outstrip inflation during the course of this period. I \u00a0stress the 'very slightly' \u00a0because once \u00a0the figure for wages and salaries is adjusted for the number of people in employment what average earnings show is that wages will not quite cheap pace \u00a0with this inflation marker. \u00a0The truth is \u00a0that this forecast says that for most people in the UK \u00a0the next five years are going to be a matter of standing still, \u00a0at best.<\/p>\n

Third, \u00a0this, however, will not be true for those living off investment income: \u00a0profits are forecast to rise \u00a0at a rate above inflation.<\/p>\n

Consumer \u00a0spending is also forecast to grow at a rate somewhat higher than average earnings. Now we know where \u00a0growth will come from: \u00a0the government is expecting us to get increasingly into debt.<\/p>\n

All, in all \u00a0this is not a pretty picture: \u00a0for ordinary people real earnings growth is not going happen within the foreseeable future and the only way they will make ends meet is by borrowing.<\/p>\n

This picture is, however, one that is \u00a0painted before tax is taken into account. \u00a0This is the tax data:<\/p>\n

\"Screen<\/a><\/em><\/p>\n

\n

To interpret this data I have done some early morning spreadsheeting:<\/p>\n

\"Screen<\/a>What I am seeking to find is what the forecasts are really saying as to future trends in UK tax. So, I have looked at growth rates in tax revenues by type and by year and I have then compared these forecast growth rates to the nominal growth in GDP to see whether they are above expectation or not. There are a few niggles in doing this, I admit, but not enough to change the overall conclusions that can be drawn, which are important.<\/p>\n

First, the overall growth in nominal GDP in the period 2012-13 to 2018-19 is 30%.<\/p>\n

But income tax revenue is forecast to rise by 40%. There are \u00a0going to be real income tax rises after the next election.<\/p>\n

The \u00a0forecast rate of growth for self-assessment income, much of which comes from self-employed people, \u00a0is astonishingly high: \u00a0it is more than double the rate of increase in nominal GDP. \u00a0Either the government is expecting a boom in investment income or, \u00a0more likely, \u00a0many more self-employed people. \u00a0 How, however, when productivity is low, and self-employed earnings are falling, they expect the tax yield to grow so heavily \u00a0I am not sure. \u00a0This looks wildly optimistic to me.<\/p>\n

In contrast \u00a0to the forecast increase in income tax revenues, national insurance is only forecast to rise at a rate just above nominal GDP. This may be because of the growing numbers of self-employed people: they, overall, pay less national insurance \u00a0as a proportion of \u00a0their income but have fewer rights to claim benefits as a consequence.<\/p>\n

More surprising still is the forecast decline in VAT revenue \u00a0where there is suggestion that \u00a0income will fall at a lower overall rate the nominal GDP. \u00a0Is a VAT cut on the cards after the next election?<\/p>\n

However, by far the most significant change is with regard to corporation tax. Although the government clearly expects a booming profits from the self-employed they are expecting larger \u00a0businesses, \u00a0which are almost invariably run through companies, \u00a0to enjoy real cuts in their tax paid over the next five years despite the fact that they are \u00a0forecast to enjoy a significantly bigger part of total national income than at present. \u00a0this is true even when the decline in North Sea oil revenues (the offshore element of corporation tax receipts) is taken into account.<\/p>\n

So, what's the overall story? I suggest it is this.<\/p>\n

First, for most people will be no income growth over the next five years.<\/p>\n

Second, expect \u00a0significant income tax increases.<\/p>\n

Third, many more people will be self-employed.<\/p>\n

Fourth, a VAT cut looks like a possibility at some time over the next few years.<\/p>\n

If you want to cut your taxes, incorporate. The government is guaranteeing that big business is going to have a good time over the life of the next Parliament.<\/p>\n

Sixth, \u00a0expect to borrow more: there is no other way that the growth that the government is forecasting will happen.<\/p>\n

In summary: \u00a0it's not a pretty economic outlook.<\/p>\n

\n

\n

\n","protected":false},"excerpt":{"rendered":"

I can remember \u00a0when my post-budget reading used to be all about changes in specific tax laws. I still do that, \u00a0but I admit that
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