Strong labour market drives taxes up, outweighing debt interest hit to the public finances from higher inflation

The UK’s strong, Omicron-defying labour market recovery brought in higher-than-expected tax revenues and healthier public finances ahead of the Chancellor’s Spring Statement next month, the Resolution Foundation said today (Tuesday) in response to the latest ONS data.

Strong receipts – including higher than expected income taxes from self-assessment and PAYE – were £26.7 billion higher in the financial year to January than the OBR forecast, while overall borrowing was £17.8 billion lower than forecast.

Spending last month was actually higher than January 2021, despite this January not seeing the lockdowns and furlough spending of last year, as a result of debt repayments rising by £6.1 billion off the back of higher inflation.

James Smith, Research Director at the Resolution Foundation, said:

“Britain’s Omicron-defying labour market recovery is benefitting both workers and the Chancellor, with tax receipts this year so far over £25 billion higher than forecast by the OBR last Autumn.

“These strong receipts include income taxes, both via PAYE and self-assessment, reflecting a strong labour market. There are some signs of faster earnings growth for higher earners, who pay a higher marginal rate of tax.

“The warning in an otherwise welcome set of figures is the £6.1 billion increase in dept repayments stemming from higher inflation. As a result, the state actually spent more this January than during lockdown last year.”