Wage stagnation has increased the deficit by at least £33bn, says TUC

16 February 2015

The government is collecting £33.4bn less in income tax and national insurance than official forecasts suggested because of the lack of earnings growth in the UK, according to independent analysis in The living standards tax gap just got bigger, a report published today (Monday) by the TUC.

The analysis is based on the wages forecast made in June 2010 by the Office for Budget Responsibility (OBR) – the government’s official watchdog for fiscal policy.

If earnings growth had been in line with the OBR forecast, income tax and national insurance receipts this year would total £308.4bn. But the TUC analysis finds that the Treasury is now expected to collect just £275bn.

The £308.4bn figure does not take into account reduced revenues as a result of the government’s income tax cuts. However, if the government had chosen not to introduce unfunded tax cuts (which have provided far less support to low income workers than they would have received from wage rises), revenues would be even higher, rising by a further £9.7bn.

The TUC says that the government’s failure to get wages growing across the current parliament has left it with a much larger deficit than planned – a view reinforced by recent revisions by the OBR. In its December 2014 Fiscal Outlook report, the OBR said it had increased its forecast for government borrowing due to “a large and increasingly downward revision to receipts, notably income tax”.

The OBR now expects the government to have borrowed £91bn in the year to March 2014/15, which is £54bn higher than the Chancellor had originally planned.

The Institute for Fiscal Studies (IFS) suggest that an additional £50bn of either revenue or spending cuts will be needed to close the deficit by 2020. However, the TUC analysis suggests that if wages had grown as the OBR originally expected – and if the government had not pursued an agenda of unfunded tax cuts – there would have been no need. There would be enough revenue already for the deficit to be almost completely gone.

TUC General Secretary Frances O’Grady said: “The Chancellor has failed to reduce the deficit because of his failure to get wages growing. He spent the last five years shrinking pay packets and as a result he plans to spend the next five shrinking the state to a level not seen since the 1930s – before we had the NHS and welfare state safety net.

“When wages go up, consumers spend more, businesses can grow, more income tax and national insurance rolls in and the deficit shrinks. We need a new plan for the economy that gets wages growing and keeps them growing.

“We can’t cut our way to a strong economy any more than we can dig ourselves out of a hole. More austerity will keep us stuck in a downward spiral. It’s time for a new long-term plan based on fair pay settlements and investment in the skills, infrastructure and innovation that creates decent jobs with decent wages.”

NOTES TO EDITORS:

- The analysis was undertaken for the TUC by IPPR. The full report The living standards tax gap just got bigger can be found at https://www.tuc.org.uk/sites/default/files/The%20living%20standards%20tax%20gap%20just%20got%20bigger%20FINAL.pdf

- The analysis is an update on previous TUC/IPPR figures published last year and it takes into account the OBR's December 2014 forecast and the latest ONS data on inflation, earnings and tax receipts.

- The income and national insurance shortfall has occurred despite the OBR basing its 2010 forecast on low expectations for a wages recovery. If wages had recovered to match their pre-recession trend of 4.3 per cent annual increases, the Treasury would this year be collecting £49.6bn more in income tax and national insurance.

- TUC analysis has previously shown that the richest families have gained the most from the government’s income tax cuts: http://www.tuc.org.uk/economic-issues/economic-analysis/tax/one-four-women-do-not-earn-enough-benefit-latest-personal. 

- The TUC is organising Fair Pay Fortnight between Monday 16 February and Sunday 1 March, which is part of the TUC’s Britain Needs a Pay Rise campaign. It will feature a series of events across England and Wales to raise awareness about low pay, pay inequality and the need for higher pay settlements in the public and private sector. For more information please visit www.fairpayfortnight.org

- All TUC press releases can be found at www.tuc.org.uk

- Follow the TUC on Twitter: @tucnews