Unintended Tax-losses

UK unemployment jumped from 5% in 2008 to a high of 8.4% at February 2012, thanks to the shedding of labour following the 2007/09 financial melt down. Since then, there has been a marked turn-around, with unemployment falling to the current 6.4%, much to the surprise of most economists’, analysts and the Bank of England boss, Charmer Carney.

If one digs a little deeper within the employment data, you very quickly realise that roughly two – thirds of new jobs created since 2008 are classed as self employed, with the trend escalating over the past year or so to the highest level within the past 14-years, at 15% of the workforce. According to figures from the Office for National Statistics, or ONS, of the 1.1m new jobs, 732K are self employed, with the number aged over 65 doubling during the period.

29 August 14 blog

This is good news at first glance, but, has had unintended consequences, in that it also answers the confusion as to why UK average earnings are not rising. In fact, as can be noted within the chart above, earnings are now falling both in nominal and real terms.

Average UK earnings, excluding bonuses, have fallen from 4.5% annualised in 2007 to -0.2% now, dragged lower by average incomes of the self- employed, which have collapsed by 22% over the same period.

Aside of also explaining just why the rate of economic recovery has been sub-par, despite UK GDP allegedly being the strongest within the G7, the aforementioned has a further unintended consequence on the Government’s finances. The De-Flation of earnings has reduced the tax-take to HMG, plus the self-employed have more control over how and when they pay taxes. This would suggest that taxes in the round will have to rise, as the cost of running the public sector shows very few signs of falling.

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