Income tax revenue is falling below expectations this year due to sluggish wage growth, the Office for Budget Responsibility (OBR) said yesterday, warning it will hit efforts to close the budget deficit.
The economy is expanding strongly and creating jobs at a record pace, which should be good for the government’s finances. Unemployment stands at 6.2 per cent, its lowest since 2008.
But pay growth is low, and many of the new jobs are going to young or low-skilled people who earn relatively low wages – and therefore do not pay much tax.
Income tax revenues rose five per cent year-on-year in August, official figures showed.
But that is less than the OBR had forecast earlier this year, so the budget deficit is bigger than planned.
Chancellor George Osborne had to borrow £45.4bn from April to August, up £2.6bn on the year, throwing the chancellor’s plans to cut borrowing by £11bn off track.
“We’ve been getting fewer pence of revenue coming in for every pound of wages and salaries that’s generated. From the perspective of the public finances, that’s not particularly good news,” OBR chairman Robert Chote said.
“This continued story of earnings growing less rapidly than expected and employment growing more rapidly than expected does perhaps suggest that we are more likely to be disappointed than over-achieve on income tax receipts this year.”