The UK is the only major G7 economy where taxes have not helped to close the deficit
In Box 4.5 of their Economic and Fiscal forecast the OBR set out a few helpful home truths about the UK’s deficit reduction plan compared to competitor economies over 2009 to 2014.
Their conclusions are striking:
The UK was the only country where the deficit has not been reduced by having revenue growing faster than national income. That revenue weakness has come despite employment growth in the UK over the past five years having been the fastest among these economies. It largely reflects weakness in income taxes, due to policy measures and disappointing productivity and earnings growth
As the TUC has argued, the deficit remains far higher than the Chancellor originally anticipated (see Geoff Tily’s blog for more information on just how much) because tax revenues have hugely disappointed. The OBR has now helpfully shown just how far this is from the experience of other countries. In the USA, Germany, France, Italy and Japan increased tax receipts have helped to close the deficit – in the UK receipts have disappointed so much that over the same time period they made the deficit worse.
The chart below sets this trend out. Yellow bars indicate a positive contribution to deficit reduction, while red bars indicate a downward effect (ie an increase in the deficit). The UK is the only country with a red bar in the third column, indicting it is only here that taxes have made no contribution at all to getting the public finances back into better shape.