June 9, 2010 • 11:00 pm

Perhaps the most stinging criticism of Labour’s economic record has been the assertion that it ran up a fiscal deficit even during the boom years.

“We had a significant deficit problem even before the recession,” said David Cameron in his 7 June speech outlining the need for painful spending cuts.

It is, of course, politically expedient to portray the previous Government as having recklessly spent more than it earned, but analysis from Tax Research UK suggests the accusation carries little weight.

The claim

On the Tax Research site Richard Murphy wrote that if the Government had used corporate accounting methods, there would have been no gap between income and spending from 2002 to 2007.

He argued that if the Treasury had used accruals accounting, calculating tax income from the time it was owed, rather than when it was received, as is the case under a cash-flow system – Government receipts on paper would have kept pace with spending.

Mr Murphy wrote: “Taxes on profits from companies and the self-employed often lag up to a year behind the earnings to which they relate. If the one-year lag in receipts is eliminated, i.e. taxes were accounted for when the liability to pay them arose and not at the time that payment was made … one could say the deficit between 2002 and 2007 simply disappears.

“This is not an accounting trick. Within tolerable margins this is the reflection of economic substance that accruals accounting allows and that cash-flow accounting never does.”

The Treasury, however, disagrees.

A spokesman told Full Fact: “[Murphy's] article misunderstands entirely the way we account for public finances. We already use accruals accounting.

“It’s also quite wrong about the payment of tax lagging by a year. Many taxes are paid much earlier and corporation tax, for instance, can be paid slightly in advance.”

Independent experts are also sceptical.

Andrew Gambier, manager of technical strategy at the Institute of Chartered Accountants in England and Wales, says that the Government uses a mixture of accruals and cash-flow accounting, with items such as Private Finance Initiatives and state pension liabilities covered by the latter method.

Mr Gambier said: “I think Richard Murphy’s argument is a nice try, but it’s overly simplistic. I’m concerned about him simply shifting the income graph forward a year.

“Large, profitable businesses making more than £1.5 million profit a year have to make payments on account of their corporation tax liability so they are already on an accruals basis. Also, as corporation tax is a small proportion of overall tax receipts it wouldn’t make much of a difference even if he were right – and he’s not.”

The 2009 pre-budget report states that of the Government’s £498 billion total receipts, £34 billion came from corporation tax.

Self-assessed tax, which Mr Murphy also flags up as a delayed receipt, only comprised £22 billion of the total £139 billion income tax receipts in 2009.

Conclusion

Mr Murphy’s claim that an alternative accounting method would have eliminated fiscal deficits from 2002-2007 is inaccurate.

Firstly, the Treasury already uses accruals accounting for many of its public finance calculations.

Secondly, one cannot apply a one-year delay to all tax receipts – many credit Treasury books far closer to the time tax liabilities are incurred.

Thirdly, Mr Murphy’s point about corporation tax being paid a year late is mistaken when one looks at big business.

Finally, it is worth noting that the two areas of tax that Mr Murphy flags up – corporation and self-assessed – are relatively minor constituents of total Government income.

Mr Murphy was unavailable today for comment.

 

Alex Derber

 

 

 

 

 

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