James Moore: Dear George, pay rises are the answer to reducing our deficit

Outlook The latest public sector borrowing figures represent a body blow to the Government, one made all the more painful given that they came out on the day of Ed Miliband’s speech to the Labour Party conference.

Despite more than four years of austerity, the deficit remains above target and above where it was last year. George Osborne’s cuts-led reduction programme isn’t yet derailed but the figures represent bad news given the way he has staked his reputation on stabilising the public finances ahead of the next general election.

How, with economic growth of between 3 and 3.5 per cent, is this happening?

While the level of employment remains reasonably healthy, for income tax receipts to start growing, wages need to rise. The UK’s income tax system is a relatively progressive one so growth in average income delivers a much stronger rise in tax receipts than an equivalent increase in employment.

The Chancellor’s numbers have been helped by a profoundly regressive tax – VAT – which has provided a surge in receipts as the consumer-led recovery has gathered pace.

But the real laggard has been corporation tax where receipts have been dismal. That’s hardly helped by the banking sector, which still isn’t contributing much thanks to tax losses carried over from previous years.

The situation might be helped by more effective enforcement, and by supporting the OECD’s efforts to crackdown on dodges like the Dutch Sandwich and other cynical techniques employed by multinationals.

Unfortunately, however, Britain’s answer to the conundrum of how to boost the contribution from this sector continues to be taking a lead in the global game of beggar thy neighbour by promising to get its rates down to 20 per cent, by a distance the lowest of any big economy, as soon as possible.

Whether that will help improve receipts – given that the rates in the Netherlands, Ireland and Switzerland are, and will remain, much lower still – is questionable.

It’s not all over for the Chancellor by any means. Even though the trend looks bad, these monthly figures need to be treated with a degree of caution. They are apt to vary sharply and there are various factors that could result in an improved picture later in the year as the impact of wheezes – such as the shifting of when big executive bonus payments were paid to take advantage of his millionaires’ tax cut – unwind.

But at the end of the day, to get deficit reduction firmly back on track, to coin a phrase much in vogue with TUC general secretary Frances O’Grady at the moment, Britain needs a pay rise.