Plunging UK Tax Receipts Drives Record Borrowing

by Robert Lee, Tax-News.com, London

22 June 2009

Official statistics show that the UK’s public finances went from bad to worse in May as tax revenues plunged across the board in tandem with rising unemployment, suggesting that the country’s taxpayers will be paying the price for the government’s profligacy for many years to come.

While May is traditionally a weaker month for tax receipts following income tax payments made earlier in the year, the Office of National Statistics reported that income tax revenues were 11% lower than in May 2008, value-added tax (VAT) receipts were 18% lower than the same month last year and the corporate tax take was a worrying 27% down compared with a year ago.

Meanwhile, as unemployment hit a 12-year high of 2.24 million this month, the government’s outlays have soared, further exacerbating the government’s already shaky fiscal foundations after bailing out several of the nation’s major banks.

Spending on benefits was higher by 8%, or GBP1bn, in May this year compared to the same month last year. Overall spending for the month was 16% higher than a year ago at GBP50.6bn. Total tax receipts for the same month were just GBP30.6bn.

The upshot is that Chancellor Alistair Darling had to borrow GBP19.9bn in May, and net borrowing has already reached GBP30bn after the first two months of the financial year – double the level of borrowing at the same point last year.

Total outstanding government debt has increased to GBP774.8bn, about GBP150bn higher than last year’s debt. This equates to 54.7% of the UK's gross domestic product.

Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club, described the numbers as “dismal” for the government, and warned that the debt burden on taxpayers could be “colossal” for many years to come.

"After getting off to a bad start in the new financial year, the public finances have continued to worsen,” she said. "Public Sector Net Borrowing jumped from GBP12.2bn in May last year to GBP19.9bn last month – the highest borrowing figure recorded since the series began in 1993."

Mehta added: "The public finances will continue to deteriorate for some time as the economy continues to shrink and unemployment increases. Even when a recovery gets underway, the government will be borrowing large sums of money which will put the public finances under enormous strain."

"Without a credible plan to rein in spending, the debt burden on UK taxpayers will be colossal, and with Standard and Poors downgrading their outlook on the country from ‘stable’ to ‘negative’ last month, there is continued pressure on the government to tighten fiscal policy further."

Earlier this year, the Institute of Fiscal Studies (IFS) warned that the government – whatever its future colour – will have to implement further tax increases or cuts in spending plans worth almost GBP40bn a year by 2015-16 if the public finances are to be repaired as quickly as the Chancellor hopes. If this is to be raised entirely through taxation, then taxes would need to be raised by an average of GBP1,250 per family, the IFS calculated.

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