The deficit figures today are disappointing.  There are a slew of one-offs, such as the 45p tax change a year ago (see Guardian story).

I think some of the story has to be here.  A quick X-Y of the NGDP growth vs the growth in Income tax revenues of three distinct periods:

TaxRevenues vs NGDP growth


The actual slope hasn’t changed much. Tax revenues are geared; they fall unless NGDP is growing at least at 2%, but then the slope has an elasticity of about 2.

The problem has been that NGDP has been weak; between 2 and 4% for much of this recovery.  And far too volatile!  Who on earth could have been calling for tighter money when it was growing only 2-3% a couple of years ago?

For years before the crash we could grow NGDP at 6% or so.  Income tax revenues grew around 7-8%. Why not now in the recovery phase?


3 thoughts on “Why is the deficit not improving faster?

  1. If we had been growing at the non-EU world average of 5.5% over the last 3 years we would be 17% better off and tax income £130bn greater (actually probably a little more because of progressive rating).So no deficit. We could have done that if the LabConDems weren’t actively preventing growth.

  2. About this, I’m just wondering how things would look if it were compared to GDP per capita. My main thinking is that the increased personal allowance would interplay with slow GDP/capita growth (ie a greater proportion of GDP would no longer be subject to income tax if you excuse the slightly strange phrasing).

  3. AC

    I think that is a really interesting possibility. Put it this way: a quick back of the fagpacket calculation suggests that if income tax has a 10k threshold, the difference between having four employees on £25k each or five on £20k each becomes material; in the case of the former, the taxable amount is £60k not £50k. If the threshold were £6k, the difference would be between £78k and £70k, so the amount lost is less.

    I am not sure how easy it is to show in the aggregate stats, however


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