Alistair Darling sees finances race deeper into the red as tax take tumbles
A slump in tax receipts caused by the recession has driven the Government’s finances farther into the red than at any time for 15 years.
Official figures yesterday confirmed mounting strains on the Treasury, with Alistair Darling forced to borrow £67.2 billion in the first ten months of this financial year.
The figure was almost three times as high as over the same period the previous year. The news was followed by warnings from City experts that the Chancellor’s full-year forecast for public borrowing of £78 billion would prove to be far from accurateand that he would probably have to raise it even higher in his April Budget.
Economists said that the eventual figure for this year could soar to £100 billion, with borrowing set to surge still higher in 2009-10.
The Chancellor has already pencilled in borrowing of £118 billion for next year - equivalent to 8 per cent of gross domestic product and the highest since at least the early Sixties. Under the Conservatives the previous peak in public borrowing during recent decades was at 7.7 per cent of GDP in 1993-94, in the aftermath of the recession of the early Nineties.
Economists warned yesterday that the Government could plunge into the red next year by as much as £200 billion as the worst recession of the postwar period undercuts the flow of taxes into the Treasury and as the cost of benefits for ever higher numbers of unemployed people spirals upwards.
Borrowing may also be driven even higher - raising the prospect of sharp increases in taxes - if Gordon Brown and Mr Darling now opt for a further, American-style, stimulus of tax cuts and increased spending, following the strategy of President Obama. There were warnings from the City, however, that the Government’s scope for such moves might be constrained by the rapidly worsening state of its finances.
“The dreadful and deteriorating state of the public finances clearly places a limit on the size of any further fiscal stimulus and underlines the need for a major fiscal consolidation [tax rise] at some point in the future,” Jonathan Loynes, of Capital Economics, a leading consultancy, said.
The effect of the recession on the Treasury’s books was emphasised yesterday by detailed figures confirming that tax payments made by individuals and businesses were being curtailed severely.
The Chancellor’s slice of consumer spending, from VAT payments, is particularly affected as Britons abandon their previous high-spending habits. Payments of VAT from shops and other businesses tumbled by more than a tenth last month compared with levels a year ago. In the past three months VAT receipts have slumped by 14.5 per cent compared with the same period a year ago. The Treasury has factored in only a 0.4 per cent drop for the second half of the financial year to April.
Companies are also paying less tax. Corporation tax payments in both January and over the past three months taken together were down by almost a quarter compared with a year earlier.
Fears over the state of the Government’s books are being increased by the Treasury having to take on the debts and liabilities of the nationalised and part-nationalised banks as part of its multibillion-pound bailout of the banking system. That is set to add up to £1.5 trillion to the national debt.
The Office for National Statistics confirmed for the first time that the debts of Lloyds Banking Group, which includes the merged Halifax Bank of Scotland, as well as Royal Bank of Scotland and Bradford & Bingley, will now have to be counted into the national debt after the bailouts.
That is set to push the national debt up by between 70 per cent and 100 per cent of GDP. Already the debts of Northern Rock and B&B have helped to push national debt to 47.8 per cent of GDP.
Economists back the Treasury’s view, however, that this exaggerates the true scale of the taxpayer’s exposure since under official accounting rules few of the nationalised banks’ assets can be be counted in the Government’s books, although many of these remain sound.
But opposition parties seized on the figures, with the Conservatives warning that they were “just the beginning of Gordon Brown's debt crisis”.
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