Signs grow that recovery is fading before it even got under way

The fall in anticipated government revenues, just announced, must send alarm bells to anyone who still believes that the current economic uptick is going to go anywhere. The OBR had predicted that government revenues in the 2014-5 tax year would reach 38.8% of national income. They have been progressively revising down their forecasts to as low as 37% now, a level that could fall still further as this year proceeds. This is a significant setback since a downgrading of 1.8% represents a loss of £32bn in government receipts compared with what had been confidently predicted.

The reasons for this fall lie with lower tax receipts from the financial sector, declining North Sea oil revenues, and falling real wages which lower income tax revenues. But what really gives meaning to this shortfall is that, despite the Treasury estimating that the government has imposed £23bn a year net tax increases (mainly VAT) since the 2010 election, the tax take in this coming fiscal year is expected to be no higher than it was in 2010-11. Even more significant, whilst in the recovery from the 1990s recession tax rises led to a surge in revenues, from 34.8% of national income in 1993-4 to 37% in 1997-8, the same has not happened this time round at all.

At the same time coincidentally another report was published with essentially the same message. According to an IPPR think-tank report, also published a few days ago, the UK has suffered a drop in training four times greater than any other EU country during the recession. This is leading to a skills deficiency which threatens to hold back the recovery, as many employer federations are already complaining.

In fact Britain before the crash had one of the highest proportions of the working age populations in education and training, but between 2007 and 2012 this dropped sharply. Indeed one of the most noticeable features of the recession has been that employers, whilst retaining most of the workforce, nevertheless has not invested anywhere near sufficiently in either human or physical capital. The effect of that is seen today in Britain now having one of the lowest levels in productivity within the OECD.

When this is combined with wages which are either flat or still declining in real terms, plus an import-export gap already over £100bn a year in traded manufactured goods and still growing because of an over-high sterling exchange rate, it is easy to see that any recovery will be short-lived because none of the factors to give it sustainable foundations are present. Osborne’s options are narrowing sharply, and the only question if whether the downturn occurs before or after the May 2015 election. It may be a close-run thing.