TAC0098

Written evidence submitted by David Brian Smith (Proprietor at Beacon Economic Forecasting)

 

This brief update is an addendum to my 25th July paperWhat is the upper Limit to the UK’s Taxable Capacity?’. This earlier note was written when there was no official data available beyond 2020 Q1, a period during which the Covid-19 lockdown was substantially absent. Subsequently, the Office for National Statistics (ONS) has released provisional data for 2020 Q2, even if these numbers might be changed when the ONS’s major annual ‘Blue Book’ revisions are introduced at the end of this month. The second quarter figures provide the first ‘fix’ on the situation at the height of lockdown. Because so much of the importance of these figures lies in the latest quarter, the raw data has been charted and not just the smoothed four quarter running average employed previously.

Chart A: Ratio of UK General Government Expenditure to GDP at Factor Cost 1956 Q1 to 2020 Q2 (%)

Chart A above updates Chart 5 (page 11) in my earlier note. It reveals the huge spike in the government spending ratio associated with the lockdown from 43.2% in 2019 Q4 to 45.8% in 2020 Q1 and 64.9% in 2020 Q2. It can only be hoped that the latter represents a spike rather than a new plateau. The Blue Line shows the actual quarterly figures, the red line the smoothed trend used before.

Chart B: Ratio of UK Non-Oil Taxes to UK Non-Oil GDP at Factor Cost 1956 Q1 to 2020 Q2 (%)

Chart B repeats Chart 6 (page 12) from my previous paper. Unfortunately, the large seasonal swings in tax receipts mean that the ratio of noise to signal is extremely high. One positive suggestion is that it would be a great help, when trying to monitor the public finances, if the ONS could revert to their earlier practice of seasonally adjusting the key magnitudes in the general government accounts, despite the technical difficulties involved.

Finally, Chart C (overleaf) shows the ratios of general government expenditure and non-oil taxes to residual private sector GDP after total government spending has been subtracted from GDP measured at Factor Cost. Conceptually, this gives a cleaner measure of the underlying tax and spending burdens because it is logically impossible for government to tax itself, even though government spending is included in official measures of GDP. The smoothed tax burden appeared as Chart 7 (page 13) of my previous note.

 

Chart C: Ratios of General Government Expenditure and Non-Oil Taxes to Residual Private Sector GDP 1956 Q1 to 2020 Q2 (%)

Conclusion

 

There are no real conclusions from this note other than: 1) the UK finances are currently  up the proverbial creek in a barbed wire canoe without a paddle, and 2) one must hope and pray that the second quarter figures are an aberration that will unwind as soon as possible. However, that depends on Covid-19 and the future competence of the official response to its malfeasance.

 

September 2020