UK Tax Revenues Plunge Amid Economic Slump

by Robert Lee, Tax-News.com, London

23 February 2009

The effect of the deepening recession on the UK's public finances has been brought into context after official figures revealed that tax revenues slumped last month, raising the prospect of higher taxes and government spending cuts in future years.

With company profits down, business insolvencies growing at a worrying pace and the unemployment queues lengthening, the latest set of data from the Office of National Statistics makes grim reading for Prime Minister Gordon Brown - who has staked his political future on spending his way out of recession - as tax receipts fall across the board, forcing the Treasury to borrow yet more to stay afloat.

According to the data, total tax receipts were 11% lower in January 2009 compared with the same month last year. Income tax receipts were 7.7% lower than in January last year while corporate and petroleum tax receipts fell an alarming 22.5% over the same period.

The month of January is traditionally a good month for the Treasury, due to the self-employment tax filing and payment deadline at the end of the month, and companies making one of their quarterly corporation tax instalments; thus the figures highlight the scale of the growing crisis in the public sector finances. Moreover, with the City having warned recently that tax receipts from financial services, which have contributed more than 20% of the overall tax take in recent years, are also likely to fall sharply as a consequence of the credit crisis, the government can no longer rely on this particular cash cow in the months and years to come to plug the budget gap.

The ONS report also showed that value-added tax receipts have fallen sharply, partly as a consequence of lower consumer spending and partly as a result of the temporary 2.5% cut in the standard rate on December 1, 2008. Compared to January 2008, VAT receipts last month fell by 20%.

The surplus on Public Sector Net Borrowing at just GBP3.3bn in January, was less than a quarter of that achieved in the same month last year. This has brought public sector borrowing to GBP67.2bn in the first ten months of the financial year.

Andrew Goodwin, Senior Economic Advisor to the Ernst & Young ITEM Club, warns that the figures show the public finances deteriorating at an "alarming rate."

"January is an important month for tax receipts and the disappointingly small surplus highlights the severity of the government’s fiscal problems. Tax revenues were 11% down on a year ago and the situation is likely to get a lot worse over the course of this year," he observed.

"Spending will rise sharply over the coming months as unemployment surges, while the deep contraction in activity will continue to reduce tax revenues. We expect the Chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget."

According to Goodwin, a deficit running GBP4.4bn per month ahead of last year’s outturns points to an overshoot of some GBP20bn for 2008/09 compared with the Chancellor’s Pre-Budget Report projections.

The figures may also influence the Chancellor's thoughts as he considers more economically-stimulating tax giveaways in the 2009 budget, scheduled for April 22.

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