The blow to tax revenues from the credit crunch is set to send the Chancellor plunging £16 billion or more deeper into the red over the next two years than he has planned, calculations for The Times indicate today.

The estimates of the toll on tax receipts by the National Institute of Economic and Social Research will aggravate the acute financial headache already facing Alistair Darling.

With a general election expected as soon as next year, the Chancellor is already boxed in. A still deeper slide into the red would leave him with little scope for pre-election giveaways or for extra tax and spending measures to help to stave off a recession.

The institute calculates that the severe economic and financial impact of the credit crunch will mean that the Chancellor has to borrow an extra £8 billion in the present financial year, 2008-09, and another £8 billion extra in 2009-10. The £16 billion total is the equivalent of adding nearly 4p to the basic rate of income tax.

The institute also sounded a warning that in a worst-case scenario, should the credit crunch intensify, the extra borrowing needed could double again, to £32 billion over two years. That would inflict on Mr Darling a deficit for this year of £59 billion, or 4 per cent of GDP.

Ray Barrell, the institute’s senior fellow, said the scale of the blow to the Chancellor’s finances from the crunch was particularly severe because of its impact on income tax and VAT pay-ments.Income tax revenues are expected to be hit hard by the crunch and the resulting economic downturn, as earnings weaken and unemployment starts to climb. One problem area will be the City, where multimillion-pound bonus payments, which provide a rich source of tax for the Treasury, are drying up, while banks are cutting staff and salary bills. VAT receipts are expected to be squeezed as consumers curb spending in shops, bars and restaurants.

The Treasury’s coffers too will feel the impact from the housing downturn. Stamp duty payments will be hit as falling house prices and the mortgage drought lead to a drop in numbers of people moving home. HM Revenue & Customs figures released yesterday showed that revenue from stamp duty is forecast to drop this year for the first time since 2003, falling to £13.5 billion, from £14.1 billion in 2007-08.

Mr Darling was forced in his Budget to raise intended borrowing for 2008-09 and the next three financial years by £32 billion compared with Gordon Brown’s plans in the 2007 Budget. That was despite tax i n c r e a s e s from next year worth £2.7 billion by 2010. Weakening tax payments have led the Chancellor to raise his borrowing forecasts for 2008 to 2012 by £20 billion since October alone.

The extra £16 billion borrowing now expected by the institute would mean that the Treasury would plunge into the red by £51 billion this financial year, compared with Mr Darling’s forecast £43 billion. In 2009-10 the institute predicts borrowing of £46 billion, against the Chancellor’s £38 billion plan.

Oil is the key to world recovery

The shock of $140 oil has created inflationary and deflationary pressures that threaten world economy and policy tools

• Former President Bush energy adviser says oil is running out

BACKGROUND

• Oil is the key to world recovery

• Banks may need to pump billions into scheme

• UK economic growth weakest for three years

Related Internet Links

• Full credit crunch coverage

BACKGROUND

• Happy days are over for UK households

• Banks restrict mortgages by brokers

• Credit crunch halves lending at Nationwide

• JPMorgan to cut Bear Stearns jobs

• George Soros: Crunch will bite deeper in UK

Related Links

• Darling accused of being complacent

• Fall in tax payments sends warning to Darling

• Government 'needs to raise extra £8bn in tax'

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive