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£125bn blackhole as tax receipts plunge
Hugo Duncan23.10.08
THE Government could face a £125billion black hole as the country tips into recession, an Evening Standard investigation reveals today.
Tax revenues are set to slump dramatically because of the impact of the credit crunch.
Official figures will tomorrow confirm that Britain's economy shrank between July and last month the first time since 1992 that it has failed to grow.
The double whammy of a downturn in revenue from tax, plus an increase in benefits paid out as unemployment soars, presents Chancellor Alistair Darling and Gordon Brown with a political "perfect storm".
The Evening Standard analysis shows that if the economy shrinks by one per cent next year and 0.5 per cent in 2010, the Government will lose £125billion in tax revenue. To recoup such a shortfall over 10 years would require income tax to rise by 2.5p in the pound. Mr Darling has also pledged to bring forward planned investment to help the economy. But the analysis suggests the Treasury may need to borrow the equivalent of £11,000 for every household £275 billion over three years.
A £125 billion drop in tax receipts for the three years to 2010-11 would be seven per cent down on the £1,830 billion forecast by Mr Darling in the Budget.
Critics blamed Gordon Brown for the predicament, accusing him of spending lavishly during the boom rather than saving for the bust.
Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said: "Our defences required some attention during the boom years, which they did not get. The bills will have to be repaid by higher taxes or cuts in public spending."
Gemma Tatlow, of the Institute of Fiscal Studies, said: "If the Government had acted earlier we would not now be embarking on a recession with public sector borrowing and debt so high."
In the March Budget, Mr Darling forecast economic growth of 1.75 per cent this year, 2.5 next year, and 2.5 in 2010-11; tax receipts of £575billion, £608billion and £647billion over the three years; and borrowing of £43billion this year, £38billion next year and £32billion the year after a total of £113billion.
He now looks set to revise them in the forthcoming pre-Budget report, raising borrowing to fund £1,780billion of planned spending in the three years.
Both Mr Brown and Bank of England Governor Mervyn King this week warned Britain is heading for recession. The Standard's research shows that in a severe recession, where growth of one per cent this year is followed by contraction of one per cent in 2009-10 and 0.5 per cent in 2010-11, tax receipts will fall £125billion short of forecasts.
It also indicates borrowing will rocket to £65billion this year, £90billion next year and £120billion in 2010-11 a total of £275billion.
Borrowing of £120billion represents eight per cent of national output and ranks alongside the £51billion racked up by the Conservatives in 1993-94.
A milder recession involving growth of one per cent this year followed by contraction of 0.2 per cent in 2009-10 before growth of 1.6 per cent in 2010-11 will see tax receipts come in £80billion below Treasury forecasts. Government borrowing would rise from £60billion this year to £80billion and then £95billion to total £235 billion more than double the forecasts.
In London alone, stamp duty from housing sales has soared from £220million to £1.9billion in the past 10 years, but with prices down 20 per cent and transactions halved, this year's take is set to be no more than £1billion.
Job losses and lower City bonuses will also hit income tax, while corporate profits were eight per cent lower last month than a year ago. Tax receipts between April and September rose by only two per cent on last year to £243.7 billion against predictions of 4.9 per cent.
Mike Warburton, senior tax partner at Grant Thornton, said tax rises were needed once the economy recovers: "The economy would be hurt if we tried to solve it by raising taxes or cutting spending too soon."
Shadow Treasury secretary Philip Hammond said: "Gordon staked his reputation on the claim to have abolished boom and bust. It is clear the boom was a debt-fuelled illusion. The bust, however, is becoming a painful reality."
Reader views (22)
Labour = High taxes, high spending and nothing to show for it. We will, yet again, have to bail Labour out.
- Frank, Home Counties, England.
Why is this Clown of a prime minister and ex chancellor being hailed as the saviour of the financial world. It is his reckless handling of our once strong economy over the last 10 years that has brought us to this! This so called prudent chancellor has brought the country to the verge of bankruptcy. We have been lied to and cheated for 11 years and if they are allowed to continue will do untold damage to the country before they are finally banished. Its time for the public to call a no confidence motion and have an election. NOW!
- Duncan Walker, Ex Peckham now Samui, Thailand.
Don't let these communist Muppet's use this excuse to reinstate Labours 1947 exchange control act! Don't keep giving our money away. I know of one shop in the back streets of a southern Town that sends on average £2.9 million overseas each month multiply that by thousands and you can see why Britain is broke. With the original 13,000 eastern Europeans expected the free money sent back would not have mattered. However, Nu-Lying-Labour are a lot more stupid then the free-loaders.
- Mike, London, UK.
Where has all that tax gone that Brown raised the last 10 years?.
- Jacqueline, Hampstead, London.
This is the story we should be concentrating on rather than the tittle tattle of who said what about whom to whom on a yacht in the Mediterranean. Gordon Brown has let the country drift into a dreadful financial position and no amount of diversionary tactics should be allowed to obscure that.
- James Elliott, Eastbourne, UK.
And the national debt is estimated at £1.34 trillion, which is racking up an interest £125,000 per minute so if we now add another £125billion hole our national debt will be £1.5 trillion plus without any tax increases in 2009. The national debt when Labour came to office was a mere £350 billion, it was estimated that it would take 25 years to reach £1 trillion, well Labour did it in less than 10 years.
People in this country do not understand how bad and sick the British economy is in. If it were a patient it would be in Intensive Care. The madness is Ditherer & Darling now want to spend their way out of trouble the £125 billion black hole is peanuts compared to the one that already exits. Our national debt means that every tax payer is owing £60,000 each to the rest of the world who is lending us money. Are you happy with what Ditherer & Darling are doing? They will have to raise taxes by 5p - 10p in the £ just to stand still as the real shortfall is likely to be £600billion not £125billion.
- Richard K, Nottingham
Oh why worry, all the Government have to do is print more £50 notes, lots more £50 notes, which only cost 20p each to make.
- Colin Bond, London
This has been coming for years. For the last 10 years we have been paying more and more in tax, at the same time public spending went through the roof - frequently on ill thought out and ill conceived projects. At the same time companies - particularly the SMEs have been hit with avalanches of red tape. Employment and taxation legislation is way too complex. Big companies have seen this coming and are leaving - look at Shire, WPP etc. The public sector, with their glod plated pensions has grown beyond beleif - and we can not afford them. It will take 10 years and another Maggie to sort the mess left by Labour out.
- Jeremy E, London
Almost as big enough to fill the Millenium Dome.
- Roz, Chamonix, France
Rupert has hit the real problem on the head. The massive public sector employment in the U.K. has to be cut. A large public sector as a percentage of the overall work force has always been a sign of a Third World country, where a public sector job is far more desirable than one in the private sector. Neither Brown nor Cameron, and certainly not Clegg, will work on that problem. As Dave says, it will need a new breed of honest gutsy politicians to come along before the problem can be tackled and the U.K. returned to solvency. Best not hold your breath!!
- Phil Jones, London UK
If my income suddenly fell, should I cut back and live within my means or borrow to maintain my spending? It's a no-brainer. All state benefits apart from the old age pension must be slashed, so that those living off the rest of us also feel the pinch - otherwise you will get more idiots like that family of spongers last week boasting how the credit crunch meant they could get better deals on consumer goods.
- The Gene Genie, Croydon
No wonder he wants an investigation into the Corfu affair (of course Nu-Labour never asked for, let alone received, dodgy donations). He thinks that while we are distracted by which billionaire said what to whom and where, we will not notice that his 'prudent' management of the economy has landed us with massive debt. I cannot believe that anybody who actually pays tax in this country would even contemplate voting Labour next time around. Of course, all the freeloaders and spongers will, and unfortunately there are a lot of them, thanks to Gordon's largesse with OUR money.
- Beatriz, London
No wonder he wants an investigation into the Corfu affair (of course Nu-Labour never asked for, let alone received, dodgy donations). He thinks that while we are distracted by which billionaire said what to whom and where, we will not notice that his 'prudent' management of the economy has landed us with massive debt. I cannot believe that anybody who actually pays tax in this country would even contemplate voting Labour next time around. Of course, all the freeloaders and spongers will, and unfortunately there are a lot of them, thanks to Gordon's largesse with OUR money.
- Beatriz, London
I think Neil of London is right. Ever since I heard that Mandelson has been knighted I have felt helpless about what is happening in the government of our country. I for one would not pay council tax where the woman is living in a 7-bedroom house at our expense. I've had enough!
- Frederick, London, UK
woman and children to the lifeboats!
Perhaps if we get rid of all the waste of space Public sector jobs with their human rights, tender processes and useless policies we could claw back a few billion.
- Fly, london
Gordon Brown needs to act in the best interest of the country and cut public sector spending. The truth is unemployment is really in excess of 25% of the UK population becuase the 25% who work in the public sector with their generous final salary pension scheme which you and I with less generous private sector pension effectively subsidise via our council tax whilst no doubt proving some useful services create no wealth for the UK. Public sector spending is fine is you are generating the wealth to pay for it. The sad truth is that Britian is not. As we can't afford it we need to cut public sector spending massively. Until you sort the public finances out we will not dig ourselves out of the hole that we are in.
- Rupert, London
These clowns haven't got the economic sense of the average housewife, or is that houseperson.
Of course they are lumbered with the need to bribe 50 percent of the voters to keep them the votes coming the government's way. Is it time to do away with democracy as it is practised. It has got to be NO, we need a real gutsy leader who can carry the voters with him/her to face the tough decisions needed to sort many many things out, and, that person won't come from the current political class.
Come back Oliver Cromwell ..................
- Dave Morris, Sunderland
Labour are spending like there's no tomorrow, which for them is true as they know they will be out by the next election. All this spending is just to improve their image before they are kicked-out so that they won't end up in the poitical wilderness for years like the last Labour government. No doubt they are trying to end on another debt fuelled high.
- Albert Swift, Aberdeen, Scotland
Just let them try to put taxes up again: I hope the government are ready for civil disobedience and armed insurrection. Disobedience is our best, perhaps only, hope for a future without lying, cheating politicians stealing our money and spending it on killing children in their illegal invasions.
- Neil, london uk, Airstrip ONE .
Excellent article. Great research. Good to know somebody's telling it like it is. Makes a pleasant change from the usual folderol, twaddle, flummery and dead boring stuff from our leaders.
- John Problem, Hackney Wick, London, UK
This whole crisis was caused (in large part) by ridiculous lending by the banks which was cheap and easy
So Labour's answer?
More cheap and easy lending
Scary times
- Lb, London
Here's a crazy idea.. clamp down on immigration and benefits and get people off thier bottoms and into jobs.
- Charlie, London
