UK Public Finances Go From Bad To Worse

by Robert Lee, Tax-News.com, London

24 August 2009

A record deficit for the month of July has forced the UK government to escalate its already heavy borrowing as tax revenues continue to plummet amid the recession.

The Office of National Statistics (ONS) released figures on August 20 showing that public sector net borrowing for July reached GBP8bn (USD13.2bn) – the first time since 1996 that a deficit has been recorded for this particular month.

July is traditionally a good month for the Treasury as the self-employed make their second income tax payment on account for the year and companies make quarterly corporation tax payments. In July 2008, the government recorded a GBP5.2bn surplus, indicating just how rapidly the fiscal climate is deteriorating in the UK and reflecting a worrying slump in tax revenues, combined with higher expenditure on benefits as unemployment queues lengthen.

Tax receipts fell from GBP52bn in July 2008 to GBP44.1bn in July 2009. Taxes collected in the first three months of the fiscal year, which started in April, have also declined sharply, from GBP168.8bn from April to July last year to GBP148.7bn in the same period this year. Meanwhile, total expenditure was 7.5% higher last month compared to July 2008, with net spending on benefits climbing 10% as unemployment hit a 14-year high. There was also a 10%, or GBP2.9bn, increase in investment spending compared to July 2008 as the government attempted to stimulate the economy.

For the first four months of the fiscal year, which began in April, the government is in deficit to the tune of GBP49.8bn, compared with GBP15.9bn for the same period in 2008. The Treasury is forecasting a deficit of GBP175bn for the year, equal to 12.4% of gross domestic product (GDP). Total government debt stands at just over GBP800bn, or 56.8% of GDP, and the government expects to issue a further GBP220bn in bonds this year, although fresh concerns have been raised over its ability to service its debt.

The UK debt has now surpassed the levels of the mid-1970s, when the country was forced to approach the International Monetary Fund for an emergency loan. While the current Labour government has set a medium-term plan to reduce both debt and deficit, it is unlikely to be around to see the plan through with an election due to take place no later than June 2010, leaving the next government little choice but to raise some taxes and slash public spending. Indeed, recent reports have suggested that the opposition Conservatives will announce an emergency budget shortly after the next election if they are returned to power, which could increase the rate of VAT, currently 15%, to 20%.

Recommended