LONDON — The government is facing a £700 million ($US851 million) a year tax shortfall by 2020-21 as Brexit hits wage growth for the country’s highest earners.
The Office for Budget Responsibility (OBR) warned on Wednesday after the Chancellor’s budget that: “The top end [of earners will be disproportionately hit by the UK exiting the EU (due to effects on higher-paying sectors, including financial services).”
Theresa May has said she wants to take Britain out of the EU Single Market, which will result in the loss of passporting rights that allow finance companies to sell services across the 28-member bloc. This could have a devastating effect on Britain’s financial and professional services industry.
The top 1% of earners pay 27% of all income tax and so any slowdown at the top would have a big effect on tax receipts. The Financial Times calculates that the OBR’s forecasts will leave the government with a shortfall of £700 million a year in income tax by 2020-21, due to slower than expected wage growth.
The shortfall may well get worse, as the OBR warns in its review of the budget that “our forecasts since 2010 have tended to be over-optimistic and we have revised them down over time.
“The shortfalls have reflected weakness in average growth in wages and salaries and in the amount of tax raised per pound of wages and salaries — the effective tax rate.”
The OBR also notes that “PAYE income tax is the Government’s single most important source of revenue,” meaning a shortfall is a significant problem.