Despite the Recovery, the British Public Deficit Increases

Despite the Recovery, the British Public Deficit Increases

The deficit is even higher in the first seven months of the fiscal year (April to October), revealed on Friday 21 November the National Statistics Office.

Over this period, the deficit reached 64.1 billion pounds (100.44 billion U.S. dollars), or 6% more than the previous year in the same period. So, a new slippage in public finances is now almost inevitable. Over the past year 2013-2014, the deficit was 5.9% of GDP. This year’s goal is to reduce it to 5% seems compromised.

The explanation lies in the increasing number of working poor. For if there is economic recovery, it is, in part, due to the extreme flexibility of the labor market. Unemployment is certainly much lower, at 6%. But it is the part-time, “zero hour” contract, and the development of sole traders that allowed the return of employment. Wages have not kept up. And this translates into lower tax revenues than anticipated.

They rose only 1.1% in the first seven months of the year, well below the growth rate. Even more glaring, the money collected under the income tax is down 0.4%. Evidence has been mounting that low wages do not allow the British to reach a level of income sufficient to pay a lot of taxes.

The 2014-2015 objectives will not be met

The phenomenon was further accentuated by fiscal reforms introduced by the government of David Cameron. For reasons of fairness, it has increased by 50% the threshold at which income tax is taxable, bringing it to 10,000 pounds (15,669.95 U.S. dollars). This means that a large proportion of low wages escapes tax.

In part, tax revenues are offset by VAT receipts, which rose 3.2%. The improvement in activity is reflected in the stores, and the British consume more. The trend is expected to improve in January 2015, when sole traders have to pay their taxes.

But according to the general view of economists, it is not enough to straighten the accounts. This puts George Osborne, the Chancellor of the Exchequer, in an awkward position when he should have, budget draft for mid-year by December 3.

“The Chancellor of the Exchequer will rejoice at the good economic performance of the UK, particularly in relation to Europe, but he will almost certainly have to recognize that he will not meet its fiscal targets for 2014-2015″, says Howard Archer, economist at Global Insight.

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