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From The Times

May 1, 2008

Credit crunch to deliver £16bn squeeze on Chancellor's tax plans

Chancellor of the Exchequer Alistair Darling

Gary Duncan, Economics Editor

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.

Time for Mr Darling to go. He must be the worst ever chancellor Britain has ever had! Even worse than Gordon Brown and that takes some beating.

Douglas W Tott, Bruichladdich, Scotland

i am an American in London and am quite liberal minded but it is not hard to see that the expenses of the welfare state are seriously crippling this country and its people. it has created an entire generation of dependents who have little need (or incentive) to work. god help this once great nation

Alex, London, England

Oh dear...and he's already robbing from the very poorest with the removal of the 10p tax band. There will be a lot of people saying 'told you so' over the next few months.

judy, Liverpool, England

I know, an internet tax, to stop people becoming better informed. No, no, Alistair, I'm only joking!

Paul, Coventry,

Much as it pains me to give a tip to Msrs Brown and Darling, with all this borrowing knackering their "golden rule", perhaps it is time they stop banging on about it all the time.

The mere mention of gold, just serves to remind people of Gordon unloading ours at the bottom of the market.

Damien, Monchengladbach, Germany

So, no chance of every tax payer getting a US style £300 rebate then...

Mick, Cardiff, Wales

Sue Doughty, Twyford, UK

Messrs Darling & Brown will only consider raising taxes to fill the shortfall, they have no idea about reducing spending to save money.

JohnC, Warwick, UK

Call in the receivers for UK plc...

Bartman, London,

It's all tumbling down for Labour now. The coffers are empty, they've wasted it all on idiot ministerial initiatives and complicated tax & benefit regimes.
They could no sooner do what they've done in the States - give everyone a tax cheque, than fly to the moon.
New Labour? - Not a chance....

David Nammory, Liverpool,

I am not sure if can trust Alistair Darling anymore? May be i am
too mixed-up what George Osborn is written while ago?
So who to believe? May be new broom sweep clean????

Cllr Ken Tiwari (independent), Oxford, United Kingdom

Dont say Labour will have to stop throwing money at stupid and worthless schemes?!?

How will the country survive without the hundreds of quango's doing nothing but draining our cash!?!

Arthur, Newcastle,

Does this figure include lower receipts of corporation tax, for example reductions caused by banks being able to set off their bad loan provisions against profits?

David Williams, Eastnor, England

One has to feel a bit sad for Darling. He has spent years keeping his head low in other ministries waiting for this job to be handed this job by the Iron Chancellor. Now he is finding the Iron Chancellor was more rust than iron and he, as the Flunky Chancellor no longer has a place to hide!

James, Epsom, Surrey

You mention that raising £16m from tax would be equivalent to 4p on the income tax rate. But you should also mention how much the interest on the extra borrowing would cost us. I bbet that's not cheap either. My rough calculation puts it at about 0.2p on the rate - which is a 1% increase.

Duncan, Witheringhurst,

Surely this deficit will be covered from increased
income from oil and fuel revenues !!

Asco, Thrumster, UK

I find this hard to believe as Mr Darling will have benefitted enormously from the increased tax receipts taken at the petrol pump.Not to speak of increased car licence fees , taxes on Resident /non-doms and the abolition of the 10p tax band.

Ian Mcneil, Roussayrolles, France

Brown was borrowing recklessly even when the country was earning a mint - has he paid-off any of these debts, or has he just been borrowing more to pay the interest, and then borrowing more on top, year after year?

I hate to think how smashed the UK's finances really are.

Mike, Brighton, England

He must not increase taxes to pay for his oversight - he needs to cut spending and cut taxes by letting go most of the political advisors.

Sue Doughty, Twyford, UK

We heard the same in 60's and 70's under Labour. Nothing changes tax tax tax spend spend spend chickens will come home to roost. The answer is the same government spending must be reduced - the party is over. The boom was all on borrowed money now comes the bust with reality having to be faced

Pete, Barry, Wales

A depression seems to be looming....well done labour and Brown you have managed to put the country back into the dark ages....The rich will now make even more and the poor will slide further down...the result...crime goes up...social unrest.....etc etc etc etc...i will never vote labour again!!

C Kroustis, London, UK

It is interesting that the amount predicted to be the deficit is very close to the amount used to bail out the banks and encourage confidence.

R Cronin, Ipswich,

Simple answer..Abolish the tax credits system and increase the personal allowance to the level of minimum wage. This would remove overstaffed government depts, advisers and accountants and make it worth working again. Job losses in the public sector? Who am I kidding! Maydb GB and AD need a P45..

Phil, Rugby, England

Why do we have to contribute to the National Insurance? Surely, we must have an option to 'opt' out and make our own provisions for retirement or medical.

All the money in the pot is constantly being eroded. Some of that by people who are not even entitled to them, as they probably have not contributed to taxes!

I say the option to ‘opt’ out because by the time we retire we will have nothing to show for !!!!

James Cole, London, UK

Don't you mean "is set to plunge THE TAXPAYERS OF BRITAIN" 16 bn into the red??

Sarah, London,

Bet they wished they acted earlier on the liquidity crisis (as the US and Europe did) and hadn't named and shamed NR! Moral hazard suddenly becomes real hazard.

David, London,

A competent Chancellor would have run a budget surplus during the 'good' years. His successor would then have been in a position to release funds now, to reduce the effects of recession.

Frank Upton, Solihull,

What happened to prudence? Why did we not save in the good times to take us through the bad? A competent Gordon Brown, I think not.

Roger Parkes, Tunbridge Wells, England

The simple answer if there is such a thing would be to cut the amount paid out in the benefits giveaway,reduce the handouts for those who only work 16 hours a week.Look again at the stupid tax credits that only serve big business and sort out the disibility scam,this would save the taxpayer £bns.

Kenneth O'Boyle, Perth, United Kingdom

If the government is short of money, why does it not increase efficiency within the civil/public sector.

But then, Civil Servants never restrain their spending, lavish pay, benefit and retirement packages.

SRB, Abergele, UK

So much for Mr Browns comments: Unlike the Conservatives we have seen an end to "Boom & Bust"!!!

Richard, Aylesford,, Kent

At least increased tax revenue due to the high price of oil should offset this a bit.

Paul, Cambridge, UK

Why on earth should he need to borrow an extra £8 billion this year?
If this is on top of the windfall profits from the increase in revenue from the rising oil price it only demonstrates, if demonstration were needed, how profligate this government is with our money.

Bernard, Edinburgh, Scotland