IFS public finance bulletin: October 2014

Today the Office for National Statistics and HM Treasury published Public Sector Finances, September 2014. We now have details of central government receipts, central government spending, public sector net investment, borrowing and debt for the half of financial year 2014–15.

Rowena Crawford, a Senior Research Economist at the IFS, said:

"Today’s figures are disappointing. Borrowing over the first half of this financial year has been higher than over the same period last year, despite being forecast to fall over the year as a whole by the Office for Budget Responsibility. This largely reflects weakness in receipts from income tax and National Insurance contributions. In part this will be the result of temporary timing effects that will unwind towards the end of this year. But part will reflect lower-than-expected earnings growth so far this year which, unless earnings bounce back, will permanently reduce receipts from these taxes and add to an already large deficit."

Headline Comparisons

• The illustrative projection from the Office for Budget Responsibility (OBR) at the time of the March 2014 EFO was that borrowing would fall by £11.6 billion (11.8%) from £98.2 billion in 2013–14 to £86.6 billion in 2014–15. Even if this fall in borrowing were achieved, borrowing in 2014–15 would still be high by historical standards. The latest estimate of last year’s borrowing now stands at £98.0 billion, slightly lower than what the OBR thought in March
• In contrast to the OBR’s predicted fall in public sector net borrowing over the year as a whole, over the first half of 2014–15 it has been 10.3% higher than over the first half of 2013–14 (£58.0 billion compared to £52.6 billion).
• Taken at face value, this suggests that borrowing will be higher over this financial year than last, not lower as the OBR’s projections suggest. However, we should be cautious of drawing this conclusion on the basis of headline data for half of the year, not least because there are a number of factors that are known to affect the timing of borrowing this year compared to last.
• The relatively high levels of borrowing so far this year have predominantly been driven by weak growth in receipts from income tax and National Insurance contributions (with, as the OBR points out, weak property transactions and revenues from North Sea oil and gas also disappointing). Income tax receipts so far this year are only 0.1% higher than over the same period last year, compared to the OBR’s March forecast of 5.8% growth for the year as a whole, while NICs receipts have only been 1.0% higher, compared to the OBR’s March forecast of 2.5% for the year as a whole.
• A significant part of the low growth in NICs and income tax receipts so far this year is due to timing effects that will unwind later in the financial year. The drop in the top rate of income tax from 50p to 45p in April 2013 induced some high income individuals to shift income (and thus their tax liabilities) from 2012–13 into 2013–14. Where income tax is paid through PAYE this will have boosted receipts in the first few months of 2013–14 (making a comparison between the early months of 2014–15 with the same months of 2013–14 appear weak), while where income tax is paid through self-assessment the shift in income from 2012–13 to 2013–14 will depress self-assessment receipts due in January 2014 and boost receipts due in January 2015 (and therefore we can look forward to strong growth in income tax receipts this January).
• More worryingly for the underlying health of the public finances is that part of the relatively poor performance of income tax and NICs receipts will be the result of lower-than-expected earnings growth so far this year than the OBR assumed at the time of its March 2014 forecasts (this has been noted by the OBR in its recent months’ press releases). Indeed OBR Chairman Robert Chote last week said that the government was “more likely to be disappointed than over-achieve on income tax receipts this year”. Unless earnings bounce back over the coming months this on its own will add to an already high deficit.

Further information and contacts

For further information on today’s public finance release please contact: Rowena Crawford on 020 7291 4800 or email @email.

Next month’s public finances release is due to be published on Friday 21 November.

Relevant links

This, and previous editions of this press release, can be downloaded from http://www.ifs.org.uk/publications/pf

Office for National Statistics & HM Treasury, Public Sector Finances, September 2014: http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/september-2014/index.html

Office for Budget Responsibility analysis of monthly Public Sector Finances, September 2014: http://budgetresponsibility.independent.gov.uk/category/topics/monthly-public-finance-data/

Office for Budget Responsibility, Economic and Fiscal Outlook, March 2014: http://budgetresponsibility.org.uk/economic-fiscal-outlook-march-2014/

Notes to Editors

1. All the outturn figures presented in this press release incorporate changes to the definition of some components of revenues and spending, and borrowing and debt that were implemented by the Office for National Statistics last month. The OBR will not produce forecasts on this new basis until their next Economic and Fiscal Outlook (EFO), which is scheduled to be published on December 3rd. However, in their March 2014 EFO the OBR produced estimates of what they expected their forecasts for the headline measures of borrowing and debt would be under the new definitions. Where possible we therefore compare the published outturn data from the ONS with these illustrative projections.

2. All figures are on a basis that excludes public sector banks.