The mystery of the disappearing income tax receipts

With growth strong and inflation low, you would expect cash to be rolling into the Treasury

Click to follow

It looks like being a great Christmas for the retailers – and a lousy one for the Chancellor. The reason? Well, there is a strange disjunction at the moment between what is happening to consumption in Britain and what is happening to government revenues. The former is booming, the latter languishing. The explanation, insofar as we have one, seems to lie in the huge structural changes that are working through the British economy, changes that probably have quite a way to run.

Shopping first. It feels as though we are shaping up for a good Christmas spend. Until recently, “Black Friday” - the Friday after Thanksgiving that is the largest single shopping day of the year – was only so-called in the US. But the extravaganza seems to be coming over here, and we have always had a similar pattern of consumer spending, with a splurge in the run-up to Christmas. You have to chip off a bit for retailers’ hype, but retail sales this year have been running 4.3 per cent ahead of 2013 in real terms, and this year does look like being a bumper one.

If this seems a bit odd, given the reported squeeze on incomes, consider this. First, there are some three-quarters of a million people more in some form of job (including self-employment) than there were a year ago, so the pool of earners is larger. Next, prices in the shops are falling. Over the past year, average prices of goods are down 1.5 per cent, and the reason why overall inflation is up is that the price of other things, particularly services, more than offsets this decline. So we are getting part of the increase in our standard of living from lower retail prices, rather than higher incomes. Finally, though there is no way of proving this, there may have been a rise in the cash-in-hand economy as a proportion of the total.

The one thing that does not seem to be happening is people increasing their borrowings to boost consumption. Some naturally will be doing so but, on aggregate, British house-buyers are still paying back mortgage debt. From the late 1990s through to 2008 we maintained our living standards by equity take-out. Since then, it seems we have been paying off mortgage debt as fast as we can. Meanwhile, the housing market, though maybe a little softer in the past few months, remains quite solid.

All that seems pretty evident. What is happening squares with the historical pattern of the British economy during the early stages of a recovery, which is that when house prices and employment climb and people feel more confident, they spend money – which in turn sustains growth.

The greater puzzle is on the tax revenue side. This has been really disappointing. We will get more detail in the Autumn Statement next week, but if you look back to the estimates by the Office for Budget Responsibility at the time of the Budget, revenues during the first seven months of this financial year are up only 1.2 per cent as opposed to a forecast of 4.8 per cent. That estimate looked reasonable enough. An economy growing at a bit over 3 per cent a year, with inflation at a bit under 2 per cent, ought to be thumping out an extra 4-5 per cent in revenue. That is what has happened in the past.

The detail helps explain a little. Some taxes are doing fine. Corporation tax, up 3.1 per cent, is exactly on target. National Insurance Contributions, up 3 per cent, are actually a bit above target, which would fit in with the strong growth in employment. But VAT, up 2.7 per cent, is quite a bit worse than the target of 3.9 per cent. That suggests some leakage, legal or illegal. But the really big problem is income tax, the biggest tax of all. Revenues of income tax and capital gains tax were expected to be up 6.5 per cent on the year. So far they are up only 1.1 per cent. That is why the deficit is going up, not down.

This has been a huge shock, because nothing like this has happened before at this stage of the cycle. I am told senior officials are aghast, and I should think George Osborne is pretty shocked too. True, it may well be that revenues will improve in the early part of next year, when taxes from the self-employed and small businesses come in. If someone is on PAYE they pay tax every month; if they are self-employed they pay lump sums in arrears, so any shift to self-employment delays revenue. But it  is hard to see all the lost ground being  made up – indeed it is virtually impossible to do so.

It would be nice to give some explanation and we will see what the authorities say next week. Meanwhile, I suspect that several factors are at work. Lower-than-expected inflation won’t have helped. Lower oil prices don’t help either. Maybe there has been an increase in the cash economy. But the biggest problem of all may be in a change of habit by high-earners.

As the Institute for Fiscal Studies has highlighted, nearly 30 per cent of income tax comes from 1 per cent of taxpayers. That has made revenues precarious. All that is needed are small changes by that 1 per cent, for example saving more in pensions and VCTs, or simply earning less, to savage income tax receipts. So no Christmas cheer for the Chancellor.

A turkey to keep abreast of the times

If you are an American and you want to show your taste as well as your wealth this Thanksgiving, you buy a heritage turkey. Heritage is not just super-free-range. It is a bird with lineage.

Those of us on this side of the Atlantic probably don’t quite appreciate how important Thanksgiving is to Americans. While we can dress up our Christmas feast by having something other than turkey, in the States it has to be turkey. The problem is most turkeys are a bit uninteresting to eat. Enter the heritage bird.

Instead of having a Broad-breasted White, which make up nearly all the 46 million birds eaten tomorrow, you should go for one of the breeds that can trace its heritage back to the 1800s, shortly after the first Thanksgiving celebration in 1789. Some 30,000 to 40,000 will be served tomorrow. These birds were originally bred in Europe by the Spaniards and Dutch, who brought wild birds back from America in the 1500s and domesticated them for table use. They were then reintroduced in the 1600s into what eventually became the US. 

These birds are bred naturally – no artificial insemination. (Broad-breasted Whites cannot mate naturally.) They are raised outdoors and can fly, like wild turkeys. They mature more slowly, have smaller breasts and longer legs, and are generally smaller. They are better fed, being allowed to forage naturally, and are fatter. They are never ever frozen.

Result: a much tastier bird that you can feel has had a much nicer life than the poor battery ones – and a bill for $100-$200 (£64-£128) instead of $16-$32. And in Britain? Well among the breeds you can buy are the Norfolk Black, the Cambridge Bronze, the Bourbon Red, or the magnificent black and white speckled Narragansett.