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22 February 2011

A good day for George Osborne (and the 50p rate)

Extra income tax revenue means the deficit is falling faster than expected.

By George Eaton

When the 50p tax rate was introduced on earnings over £150,000, many on the right (and some on the left) predicted that it would raise little or no revenue. It was merely a piece of political symbolism, an elephant trap laid in the hope that the Tories would oppose it.

But, as Duncan Weldon points out, the latest public-sector borrowing figures suggest otherwise. Income-tax receipts for January came in at £2.38bn, up by 17.8 per cent on the previous year. Conversely, revenue from National Insurance was up by just 4.2 per cent year-on-year. This disparity suggests that the 50p rate brought in much of the extra revenue.

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Thanks to a bumper tax haul of £58.4bn (see the graph below), the government ran a surplus of £3.7bn in January (compared to a deficit of £1.3bn a year ago), the largest since July 2008. Public-sector borrowing for this year stands at £113bn, £14.1bn lower than the same period last year. If this trend continues (and it’s a big if), the total deficit will undershoot the OBR’s forecast (£149bn) by some £10bn. Osborne will have room to offer either reductions in taxation or a lower level of spending cuts, although he’s more likely to bank the surplus.

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In addition, the buoyant tax revenues suggest that the economy is performing more strongly than the disastrous quarter four GDP figures implied. An upwards revision could be on the cards. High inflation and high unemployment will give Osborne plenty to worry about in the months ahead, but this is an unambiguously good news day for the Chancellor.

UPDATE: The Spectator editor, Fraser Nelson, points out that, in the case of the self-employed (though not PAYE taxpayers), the tax paid last month was for 2009-2010. In other words, before the 50p rate kicked in. He suggests that higher earners brought forward their income to avoid the top rate.

I’d add that HMRC no longer lets you pay off tax debt on a month-by-month basis. If you owe £1,200, you pay £1,200 in January, rather than £100 a month. This could account for a large chunk of the rise in tax revenue.