Chancellor set to miss deficit reduction targets

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With the Scottish Referendum over and the Party Conferences underway the Government will soon shift its focus to the next big thing on its agenda; the Autumn Statement – the Chancellor’s warm up speech to the Budget – is pencilled in for the 3rd of December.  Once again, much of the attention will be on assessing the performance of the Government vis-a-vis its deficit reduction targets.

What do the figures say?

Today’s ONS figures show a worsening of public sector finances:

  • Public sector net borrowing excl public sector banks from April to August 2014 was £45.4bn, up £2.6bn compared with the same period in 2013/14.
  • Public sector net debt excl public sector banks was £1,432.3bn in August 2014, up £96.7bn compared with August 2013.
  • Central government expenditure in August 2014 was £54.0bn, up £1.7bn, or 3.3%, compared with August 2013.
  • Central government receipts for the financial year-to-date 2014/15 were £240.6bn, down £2.9bn, or 1.2% than in the same period in 2013/14.

So are we on target?

The short answer is no; as things stand the Chancellor is on course to missing his £95.5bn deficit target for the year. At the current rate, net government borrowing will come in at around £108bn and needs to drop faster if the Government is to hit its target before the end of the fiscal year and in time for the 2015 General Election.

Slow progress in cutting the deficit is mostly down to muted wage growth constraining income tax revenues. Higher VAT receipts from a consumer-led recovery and stamp duty income from a booming housing market have failed to offset this drag.

Is it all bad?

Increases in public borrowing this year largely reflect one-off factors such as changes in the additional rate of income tax and last year’s Swiss capital tax proceeds inflating receipts. The impact of these outliers is set to unwind as the tax year progresses.

Most analysts seem to agree that forthcoming wage growth should greatly improve the Treasury’s balance sheet by reeling in more income tax. The Chancellor is set to argue that one-off increases in income tax from the self-employed in January will also brighten the picture considerably.

Given that the deficit is highly sensitive to small changes in the growth rate of taxes and spending topped with the expectation that wages will soon pick up there is still scope for meeting this year’s targets.


All in all, the data tells us that the Chancellor is slightly off-track in achieving his budget deficit targets for this year but broadly on-track for his long-term 2019 targets. Of course, a lot will depend on what happens in the interval. Interestingly enough, wage growth is now central to the deficit debate via income tax similar to the way it drives other key economic debates in the UK – namely, the cost-of-living and interest rate debates.


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