Tax Rises On The Cards As UK Sinks Deeper Into Debt

by Robert Lee, Tax-News.com, London

23 November 2009

The odds against Chancellor of the Exchequer Alistair Darling increasing taxation in the next budget have shortened further as the latest set of figures on the public finances show that the government was forced to borrow over GBP11bn (USD18.2bn) last month, much more than it expected, to meet its costs.

The public sector showed a deficit on current budget of GBP7.7bn in October 2009, compared with a surplus of GBP2.2bn in October 2008, according to the Office of National Statistics. However, when capital expenditure is factored into the equation, the government's borrowing requirement for October 2009 leapt to GBP11.4bn – a record for that particular month – compared with a borrowing requirement of just GBP0.1bn in the same month last year.

Meanwhile, tax revenues are continuing to plummet at an alarming rate. Central government receipts were down by around 10% in the first seven months of the fiscal year compared with the same period in 2008, with steep falls in revenues from income tax, corporation tax and value-added tax (VAT). Given the Treasury's forecast of a 7.8% decline for the year as a whole, accounting firm PricewaterhouseCoopers (PwC) suggests that there will be a shortfall of GBP9bn in tax receipts for 2009/10, after adjusting for an estimated boost to revenues of around GBP3bn in the last three months of 2009/10 due to the standard rate of VAT rising back to 17.5% from January 1, 2010.

Meanwhile, central government current spending (which excludes investment expenditure) was up by 6% in the first seven months of 2009 compared to last year. While this was lower than the 7.4% rise forecast by the Treasury, with unemployment still rising and tax receipts still falling, experts suggest that the government will overshoot its budget not just this year, but for many years to come. This means that additional increases in taxation over and above those already scheduled to come into place will be inevitable, although Darling must be careful not to kill off any green shoots of economic recovery before they have a chance to spread roots.

“Today’s figures confirm the dire state of the public finances," said John Hawksworth, head of macroeconomics at PwC. "It would be premature to tighten fiscal policy before there is more evidence that the economic recovery is sustainable. However, these figures support our view that additional tax rises and further spending cuts of the order of GBP26bn will be required over the three years to 2013/14, over and above existing Treasury plans.”

Jon Sibson, partner and government and public sector leader, concluded that all of the tax and spending options in front of Darling involve "painful choices."

"The option of tax increases, including the big three of income tax, national insurance and VAT, will have to be looked at," he stated.

Coming so soon after the government unveiled its "Fiscal Responsibility Bill" in the Queens Speech, which sets out its legislative program for the coming year, the release of the ONS figures could not have been timed much worse (or perhaps better depending on one's point of view). The ONS figures further show that public sector net debt, expressed as a percentage of gross domestic product (GDP), has now grown to 59.2% of GDP, more than 10% higher than it was at end of October 2008 – and without any further fiscal measures, Ernst & Young predicts that the budget deficit will grow to GBP113bn in 2013/14, suggesting that more will have to be done to rein in debt and deficit.

"Regardless of the new Fiscal Responsibility Bill – which commits the government to halving the deficit within four years – there is no doubt that fiscal policy will have to be tightened significantly after the election regardless of who forms the next government," said Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club.

"Policy begins to be tightened in early-2010 with the restoration of VAT to 17.5% and continues with the increase in [national insurance contributions], introduction of a new 50% rate of income tax and a program of spending cuts. But the measures announced so far provide a fraction of the extra income needed to close the government deficit and the current Chancellor’s plans are reliant on optimistic growth projections being fulfilled," she concluded.

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