Tax issues remain despite confirmation of growth figure

The economy may be growing, but a lack of tax income could continue to dog the government - whoever that is - beyond May.

The UK economy grew by 2.6 per cent last year, the strongest annual performance since 2007, new data has indicated.

Office for National Statistics figures have been published with an estimated growth level of 0.5 per cent in the final three months of 2014, which enabled the annual total to be calculated.

The figure is broadly in line with expectations as a range of economic indicators have suggested a slight slowdown in growth. This has proved to be the case as growth was 0.8 per cent in the second quarter and 0.7 per cent in the third.

The first estimate includes a 0.8 per cent rise in service sector output and a 1.3 per cent increase in agriculture, while there was a 1.8 per cent dip in construction and a 0.1 per cent fall in production.

It is, of course, good news for a government facing a general election in the spring that the economy has expanded substantially, not least as it takes the overall level of GDP to 3.4 per cent above the pre-recession peak in 2008.

Among those welcoming the news was deputy prime minister Nick Clegg, who said: "Back in 2010 the economy was on its knees but decisive action by the coalition government to fix the public finances has put Britain firmly back on the road to recovery."

However, while the lost production may have been clawed back, the tax take has not. An analysis published by the Trades Union Congress (TUC) in December put the gap between actual government income and the forecast figure at £17 billion.

The TUC highlighted the issue because it was pressing the case for larger pay rises after years of wage freezes or very small increases - an issue it returned to this week by claiming that at current rates pay levels will not recover to pre-crisis levels for at least another five years. Of course, lower pay means less income tax heading into Treasury coffers at a time when the deficit remains large.

Pressing the pay case, TUC head of economics Nicola Smith said: "We need stronger, sustained growth in wages and a far better balanced recovery to ensure that living standards are protected in the years ahead.”

For those seeking tax jobs with the Treasury or accountancy firms, the tax shortfall may mean the legislative programme of whoever is in power after May seeks to turn the screws on companies and anyone finding ways of avoiding tax.

One reason for this is, paradoxically, because politicians may be keen to help low earners with more increases in the tax threshold. In Mr Clegg's response to the economic news, he said "cutting taxes for millions of low and middle earners" had been a key policy to help improve their lot.

Having persuaded their Conservative coalition partners to adopt the policy in 2010, the Liberal Democrat plan to raise the personal tax allowance to £10,000 over the course of the parliament has not just been met, but exceeded. Mr Clegg's party plans further increases and so may the Conservatives.

While that may be good news for low earners, however, it could lead to the tax situation becoming even tighter until wages start to recover strongly.