While the UK recovery has been lauded by the government, behind closed doors the Chancellor must be banging his head on his desk in frustration.
Those debt numbers should be falling during the recovery as tax receipts rise. They’re not and that’s becoming a twofold problem. We’ve spoken about the recovery not equating to increases in people’s pockets and the effects on inflation as one. The other is the benefit to the country’s coffers from increased receipts is the other.
The government is walking a fine line over the debt level and they won’t be impressed that the recovery has amounted to a 3.5% drop in tax revenues in the first 3 months of the financial year compared to last year. There were some one off factors last year though with higher payments coming from tax changes and receipts from the Swiss tax avoidance deal. Even so, we’re much further down the recovery road and Georgie boy would have been hoping that the the much improved jobs market would equate into increased tax revenues which would go some way to tackling the debt levels.
It’s not a situation that needs immediate attention as tax receipts are a lagging factor in an economy owing to the nature of different deadlines for companies/individuals reporting the year just gone. However, the run of the mill tax incomes (PAYE) will need to start showing an increase or the government and the economy could be heading for trouble. Given that we have an election next year this debt news will almost be music to the oppositions ears (what a sad fact) and will become the stick to beat coalition with.
If they can’t get the debt numbers under control we could have some choppy times in the months ahead. If it starts to materially affect the economy that may also bring the BOE and interest rates into the mix as they may need to hold off raising rates, which could potentially more harm than good.
Trading wise it’s not something actionable right now but it’s worth keeping in mind as we roll towards 2015 as it could mean a bearish directional bias coming to the fore.
