The UK government received £11.8bn in tax revenue in July, surpassing the Office for Budget Responsibility’s (OBR) March prediction of £9.9bn. This increase is largely due to self-employed workers making their second payment of the year to HMRC. The Office for National Statistics (ONS) noted that higher receipts in July typically lead to higher receipts in August as late payments are made. Strong wage growth has caused more individuals to enter higher tax brackets, resulting in increased tax payments. Additionally, rising inflation has boosted VAT revenues as shop prices rise.
These latest figures have sparked hope that there may be more room for tax cuts than previously anticipated. Economist Julian Jessop from the Institute of Economic Affairs sees potential for tax cuts. However, Chancellor Jeremy Hunt has indicated that he plans to allocate the additional borrowing boost responsibly, despite cooling price pressures in the economy. The Chancellor’s stance is supported by the fact that inflation stood at 6.8% in July, well above the Bank of England’s 2% target. Ruth Gregory, an economist at Capital Economics, believes that weaker economic growth and higher debt interest payments make the prospect of tax cuts unlikely. In July alone, debt interest payments amounted to £7.7bn, £1.5bn higher than the previous year and the highest on record since 1997 when monthly records began.
Gregory suggests caution for two reasons. First, if the economy weakens later this year as predicted, tax receipts may fall short. Second, increased market rate expectations and the rise in longer-dated gilt yields since March may result in higher debt interest spending. This would give the Chancellor little leeway to unveil significant permanent tax cuts and spending increases in the Autumn Statement without jeopardizing fiscal rules. Analysts at Investec also mention Prime Minister Rishi Sunak’s commitment to the triple lock on state pensions, which could lead to an increase of around £800 per year in annual payments. In light of this commitment, the government should not rely on anticipated tax cuts just yet.
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