Low tax revenues threaten deficit reduction plans

5 May 11
The government is set to miss its deficit reduction target due to a slow rise in tax revenues, an economic think-tank has warned.
By Richard Johnstone

6 May 2011



The government is set to miss its deficit reduction target due to a slow rise in tax revenues, an economic think-tank has warned.


The National Institute of Economic and Social Research projects that gross domestic product will grow by only 1.4% this year, rising to 2% in 2012.

In a report published on May 5, Prospects for the UK economy, economists Simon Kirby and Ray Barrell say the ‘sluggish’ performance of the economy will mean the government’s plan to eradicate the structural deficit by 2015/16 will not be met.

This is due to lower tax revenues than expected. NIESR has cut its growth forecast for 2011 by 0.1% since the last quarter, although this is lower than projections by the Office for Budget Responsibility.

Kirby and Barrell argue that this means that even if the government sticks to the spending plans outlined in last year’s Comprehensive Spending Review, it will miss its target to reduce the deficit by balancing the cyclically adjusted current budget by 2015/16.

They project that the current budget will run at a deficit of 2.2% of gross domestic product that year, compared with the OBR projection of a surplus of 0.2%.

According to the NIESR report, overall borrowing will fall to 3.6% of GDP in 2015/16, compared with 1.5% predicted by the OBR. By comparison, the calendar year 2010 saw the UK run up a deficit of 10.2% of GDP.

The OBR estimates growth to be 1.7% this year and 2.5% in 2012.

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