Falling UK tax revenue

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A few years ago, I wrote several posts about the need for a government to borrow in a recession. One thing I would have said is that when the economy recovers, tax receipts will automatically rise and the deficit will fall. You could almost say ‘solve unemployment and the deficit will take care of itself.’

The logic is that even if you keep tax rates the same, economic recovery will lead to higher tax revenues, for example,

  • With greater consumer spending – VAT and Excise duty revenues will rise
  • Rising incomes will lead to higher income tax and NICs.
  • Greater profitability will lead to higher corporation tax.
  • Recovery will help housing market and stockmarket lead to more stamp duty and capital gains.

However, one feature of this recovery is that tax revenues have proved disappointing. Tax revenues have increased by a small amount, but as a % of GDP, tax receipts are struggling to keep up. In particular, corporation tax and income tax have fallen behind schedule.

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This shows overall nominal HM Revenue and Custom revenues. Not adjusted for inflation.  (Note. This also excludes other sources of Government revenue) See Tax revenue sources for more detail.

  • In 2007/08, tax receipts were £451 bn
  • In 2013/14 tax receipts were £489 bn

This is very weak growth, when you remember these are nominal figures.

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Portugal Economic Crisis

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Between 2009-16 the Portugal economic experienced a severe economic crisis – characterised by falling GDP, high unemployment, rising government debt and high bond yields. This was caused by a combination of the global recession, lack of competitiveness and limitations of being in the Euro. What caused the Portuguese economic crisis? In the period Q4 2o10 …

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Why are there so many different Interest Rates?

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I’ve been studying economics for 13 years and I can still get confused at the bewildering array of interest rates. Basically, interest rates can range from anywhere between 0% and 2,316%

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The most important rate is the base rate (sometimes referred to as the repo rate). This is the rate set by the Bank of England. (In the US by the Federal Reserve). This is important because it determines the rate at which banks borrow money from the Bank of England. Therefore, if the Bank of England changes the base rate the commercial banks, like Natwest and HSBC will alter their interest rates accordingly.

  • Current account rates. These tend to be low, e.g. 1%. This is because you can access the money at any time. Therefore, for these accounts, the banks have to keep a greater % of cash in the bank for when people wish to withdraw money.
  • Savings Account rates. These tend to be higher e.g. 4%. The banks are willing to pay higher interest rates because they are less likely to have deposits withdrawn.

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State Intervention and Market Failure

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Readers Question: State intervention is necessary to maximize social welfare but intervention often comes at a heavy price. So why not rely on the market system to tackle the problem? It is one of the great debates of economics – How much should the government intervene in the economy. Firstly we have to consider occasions …

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Why do prices always go up in an economy?

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If you speak to someone of the older generation, it is not long before they will start saying something like: “When I was a lad, you could get a pint of beer for only 10p, its outrageous how much it costs these days” Economies are more likely to experience inflation than deflation. Despite fall in …

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GDP per Hours Worked v GDP per Capita

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Readers Question: Which is more useful for determining living standards – GDP/capita and GDP/working hour

  • GDP per capita measures national income per population
  • GDP per working hour measures national income / total hours worked in the economy.

source: US Bureau of labour statistics

GDP per capita would probably be the first measure to look at. It is the most obvious reflection of national income per person.

GDP per hours worked is also useful for determining the productivity of an economy. Though it depends what determines the number of hours worked – For example, is a low number of hours (and high GDP per hours worked) due to unemployment or greater efficiency leaving more time for leisure?

GDP / working hour could be inflated if there is a rapid drop in employment and hours worked. For example, if unemployment increased by 1 million because firms became much more strict in getting rid of surplus labour (causing structural unemployment), this would cause an increase in labour productivity and higher GDP per working hour. But, the rise in unemployment is a clear drop in living standards.

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