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UK budget watchdog puts focus on labour market for new tax forecasts

[London] Britain's independent budget watchdog said on Thursday it will work with tax authorities to look at how strong jobs growth but weak earnings have dented income tax revenues, before it makes new forecasts in December.

Labour income accounts for more than 40 percent of Britain's tax revenue, and much of it has disappointed in the current 2014/15 financial year.

The Office for Budget Responsibility had forecast that income tax receipts would rise 6.5 per cent this financial year, but so far they are down compared with 2013/14.

In an annual review of its forecasting record, the OBR said some of the shortfall reflected high earners shifting the timing of payments to take advantage of a tax cut.

Conversely, that should boost receipts next January when self-assessed taxpayers make balancing payments to adjust the level of their final tax due to the government.

But it added that weaker-than-expected wage growth had depressed income tax receipts, even as employment has improved markedly over the last year.

Some new workers do not earn enough to pay income tax, while others will earn only a little above the threshold at which people start paying tax. This has the effect of reducing Britain's effective tax rate. "As the trend of employment-driven growth has continued in 2014-15, we will be working closely with HM Revenue and Customs (HMRC) to explore further the issue of effective tax rates ... to inform our December forecast of income taxes," the OBR's report said.

The OBR also said the undershoot in British government borrowing in the last financial year, compared with its original forecast, was almost completely explained by cyclical factors that will disappear as the economy recovers.

Separately, official figures showed the tax gap - the difference between the amount of tax due and the amount actually collected - increased to 6.8 per cent in 2012/13, or 34 billion pounds (US$54 billion), from 6.6 per cent in 2011/12.

The finance ministry said the long-term trend showed the tax gap was falling, and that Britain's shortfall was one of the lowest in the world.

But the opposition Labour Party said the figures showed the amount of uncollected tax had risen 3 billion pounds under finance minister George Osborne's watch. REUTERS