UK Facing GBP40bn Black Hole In Public Finances

by Jason Gorringe, Tax-News.com, London

08 April 2009

The current Labour government - or its successor - may need 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 hoped in last year's pre-budget report, according to the Institute of Fiscal Studies.

With the outlook for the public finances significantly weaker than predicted in the pre-budget report, announced barely six months ago, this year's budget, to be presented on April 22, promises to be the most crucial in recent history. Prime Minister Gordon Brown is anxious for another round of fiscal stimulus to help support the economy, but there is equally a pressing need for the public finances to be tightened, which could mean swingeing cuts in public spending and/or a sharp rise in taxation.

Government borrowing over the first 11 months of 2008–09 is overshooting the Treasury’s pre-budget forecasts and on current trends the IFS expects the government to have to borrow GBP95bn in 2008/9 – some GBP16.8bn more than it anticipated last year. To compound the problem however, even the government has admitted that the recession in the UK is shaping up to be deeper and longer than first anticipated which could mean that tax revenues undershoot the government's target by GBP12.5bn in 2008/9.

On this basis, the IFS has calculated that if the government wants to balance the budget by 2015/16 as it intends, it will have to find an additional GBP39bn, either through spending cuts or tax increases, or a mixture of both.

"For most of its time in office, the government claims to have been taking tax and spending decisions consistent with two self-imposed goals: to keep public sector net debt below 40% of national income and to ensure that it borrows only to pay for investment on average over the ups and downs of the economic cycle. The fiscal fallout from the current economic and financial crisis means that, on the Treasury’s own figures, these goals will be missed by huge margins over the economic cycle that the Treasury expects to run from 2006–07 to 2013–14," the IFS analysis stated.

For GBP39bn to be raised without any further tax-raising measures, growth in total public spending over this period would need to be reduced by 1.1% a year, which would amount to a five-year real freeze in total public spending, the IFS calculates.

Alternatively, were the GBP39bn to be found entirely through further tax-raising measures, then taxes would need to be raised by an average of GBP1,250 per family, the Institute warns.

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