The Tory-led Coalition is facing a £17bn blackhole because its squeeze on pay has caused a slump tax payments, a study has revealed.
The major headache for Chancellor George Osborne is exposed in official forecasts by the government’s own financial watchdog, the Office of Budgetary Responsibility.
If earnings growth had been in line with the forecast made in June 2010 by the OBR income tax receipts this year would be £176bn.
But the Treasury is now expected to collect just £159bn in 2014-15 – £17bn less than forecast and sluggish growth in earnings is to blame.
The £17bn tax gap is equivalent to a rise in the basic rate of income tax by 4p, or an increase to VAT of 4%.
Frances O’Grady, TUC general secretary, said: “The government’s failure to get wages growing again has not only left families far worse off than in 2010, it’s put the public finances in a mess too.
“The economy has become very good at creating low-paid jobs, but not the better paid work that brings in income tax.
“The Chancellor’s sums just don’t add up – he can’t make the tax cuts for the better off that he is promising and meet his deficit reduction target without making cuts to public services.
“His cuts would be so deep that no government could deliver them without doing damage to both the economy and the fabric of our society.”
She urged the chancellor to use next week’s autumn statement to put a wages recovery and investment in growth at the top of the agenda and warned:” More austerity would only keep us stuck in a downward spiral.”