Recession Hits Tax Revenues

The collapse in tax revenues Tax revenues tend to fall during a recession –More people unemployed – less money from income tax –Squeeze on business profits – less revenue from corporation tax –Decline in consumer spending – hits income from VAT and duties –Drop in average house prices – affects revenue from stamp duty –Possible rise in tax avoidance and tax evasion –Cuts in bonuses and other payments e.g. overtime pay The latest figures for the government show a big drop in tax receipts These reflect the slowdown in 2008 rather than the recession Prospect of much worse to come in

The latest figures Nearly £7bn down on Jan 2008

Main Sources of Revenue

Revenues are seasonal Government' s total current receipts were £6.7bn lower than last year, with spending £2.8bn lower than 12 months earlier

Housing has been a boon for the government in recent years

The recession will squeeze profits

Should we be worried about a reduction in tax take? No –In a recession, tax revenues fall automatically – this is part of what is known as the automatic stabilisers –Some of the reduced tax revenue comes from decisions by the government to cut taxes to boost the economy –Some comes from lower oil/petrol prices Yes –This is a sign of an economy heading into a very deep recession –The drop in revenues is causing a huge rise in the budget deficit - public sector net borrowing is now almost three times higher than at the same stage last year –The result will be an enormous deficit which will required either higher taxes in the future or cut-backs in government spending –Some of the tax cuts introduced have been ineffective in increasing AD

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