One of the ways of measuring the economic output of an economy is to look at the tax revenue it raises. We do this because of the fact that there are a litany of weaknesses with the economic growth or GDP (Gross Domestic Product) numbers we receive. Only on Wednesday they received a critique from the labour market update where the employment situation was markedly different to the economic growth numbers. In the quarter just gone the extra hours worked (1.7%) far exceeded the economic growth of 0.5% which after the construction and industrial production updates is in danger of becoming 0.4%. So tax revenue received gives us a check on the state of play. If we look wider afield we see that one of the signs of the “lost decade” in Japan has been its inability to raise its tax revenue as the problems created by the latest Consumption Tax increase have shown.
Why this month?
January is the month in the UK when the self assessment forms have to be sent in by and income related taxes paid. There will be some overflow to February for it all to be accounted for but we get a look at a sector which the official average wages figure ignore. They have a threshold of 20 employees and so miss smaller businesses and the growing number of self-employed which means that they are exactly what a data series should not be which is skewed and biased.
The pattern for Income Tax
If we look back we see that the employed or Pay As You Earn (PAYE) version of this generated receipts of £130.9 billion in 2008 tax year. If we compare like for like we see that it fell and then bounced in 2011 but was then stable until 2014 when it rose to £138.3 billion and £145.1 billion in 2015. So we see some backing for the economic improvement from 2013 onwards although of course we have the issue that inflation has eroded this but pulling the other way has been the rise in the personal (tax-free) allowance albeit one offset somewhat but the failure to raise higher-rate thresholds. So the picture here is murky and hard to determine.
If we move to today’s numbers then again we get some backing for the UK economic improvement as the £12.33 billion of this January was a 5.4% rise on the £11.7 billion of the same month in 2015.
What about self-assessment?
Care is needed here as some of the money is recorded in February but today’s numbers did come with some disappointment.
Self-assessed income tax receipts increased by £0.2 billion to £12.4 billion in January 2016 compared with January 2015.
That is only a 1.6% rise and it is hard not to think of the increasing numbers of self-employed as I type this. After all on Wednesday we were told this.
self-employed people increased by 154,000 to 4.66 million
Care is needed as we are not comparing like for like as we do not have the January numbers here and it is not only the self-employed who are self-assessed. But a 1.6% rise seems a bit thin as we note an increase of 3% in their numbers. Have their wages fallen and if so what does that tell us?
So we have an odd picture here where the employed income tax numbers look excellent whilst – with caveat s- the self-employed ones are worrying and may show a decline.
Value Added Tax
This was suggested as an indicator in the comments section and the rationale behind this is simply that it gives us an idea of how much is being sold in the economy and thereby taxed.If we look back the picture is muddied by the changes in its rate but 2007 saw receipts of £92.02 billion to give you a sighter but for the reasons explained 2011’s £111.5 billion is more of a benchmark. We have seen a genuine pick-up here as 2013’s £118.2 billion was replaced by 2014’s £124.2 billion and 2015’s £128.4 billion. Perhaps the numbers are better than they look if we allow for a higher rates of avoidance and evasion in response to the rise to a 20% rate of VAT.
If we bring this up to date we see that VAT revenue is performing.
VAT receipts increased by £3.8 billion, or 3.7%, to £108.2 billion ( in the tax year to January).
This should not be a surprise as at the same time we received another excellent set of retail sales figures in the UK.
Year-on-year estimates of the quantity bought in the retail industry showed growth for the 33rd consecutive month in January 2016, increasing by 5.2% compared with January 2015.
The driver behind this has been the fall in retail prices which as I pointed out on the 29th of January last year has been an economic benefit.
Today I wish to challenge a piece of economic orthodoxy which is that lower prices are bad for us.
The 2.6% fall in prices over the year to January has been accompanied by the strong volume increase shown above. Also the 2.4% increase in spending (rounding means this doesn’t quite add-up) has fed into better VAT numbers helping the Exchequer. So far this tax year we have collected some £108.2 billion of VAT.
Stamp Duty on houses
Regular readers will be aware that it is my opinion that the Bank of England lit a fire under the UK housing market with its Funding for Lending Scheme in the summer of 2012. Thus we should see quite a pick-up in Stamp Duty receipts if the theory hold water. Well how does £6.7 billion in 2012 followed by £8.7 billion in 2013 and £11.1 billion in 2014 grab you? There was a slight fading in 2015 to £10.77 billion but it was still some 61% up on 2012.
I am not sure it could be much clearer and if other taxes had done the same we would be home and dry!
We find that the UK revenue numbers do provide a guide to what has been going on in the UK economy. We can see that whilst the medium-term picture is murky due to all the changes we see to be getting a solid increase now in both income tax (4.7%) and national insurance (3.5%) in the year so far. However whilst we only have a partial picture it looks as though the employed have been doing much better than the self-employed.
The VAT figures are more bullish in that they have a clearer rising pattern with the economic improvement and as they reflect the surge in retail sales seen in 2015 and so far 2016. It will not be too long before we find that reflected in the balance of payments numbers I suspect but enough of that for now. The clearest surge has come from Stamp Duty on houses! As Turkish pointed out in the film Snatch “Who da thunk it”
My musical summary comes from the delightful Sheryl Crow.
Everyday is a winding road
I get a little bit closer
Everyday is a faded sign
I get a little bit closer to feeling fine
Oh and as to the January Public Finances they appear to be a little better but it is hard to be clear as you see the expenditure figures have confused the concepts of up and down.
We are regularly told that there is no inflation. Today I got news that my gym and track membership at (the public) Battersea Park Millenium Arena is rising from £28 to £30 per month or 7%. Whilst the Guardian reports quite a surge in Probate Fees.
The flat £215 fee will be replaced with a new system of tiered charges that would result in some paying as much as £20,000 for estates worth more than £2m.
For estates worth between £500,000 and £1m the new fee will be £4,000, rising to £8,000 for those worth between £1m and £1.6m, and £12,000 for those valued at between £1.6m and £2m.