VAT holiday over as tax revenue collapses
• Rate will return to 17.5% from start of next year
• Annual deficit likely to exceed £175bn forecast
The Treasury dashed hopes of an extension to the government's VAT holiday tonight after the latest figures for public borrowing revealed a collapse in tax revenues and prompted City forecasts of a £200bn deficit for the whole financial year.
With the City taken aback by the rapid deterioration in the state's finances, aides to the chancellor, Alistair Darling, stressed that the Treasury could not afford the £12bn cost of the VAT cut for a second year and the tax would return to 17.5% from January 1.
Data from the Office for National Statistics underlined the impact of the recession on the government's coffers today and left Darling with no room for manoeuvre in this autumn's pre-budget report.
Business groups have been pressing for the extension of tax breaks to safeguard the economy from a double-dip recession, but Darling will insist that the government's credibility with the financial markets is more important.
The chancellor deliberately made cautious assumptions for the deficit in the budget, but the 5.6% contraction in the economy has blown an even bigger hole in the public finances than feared in April.
VAT receipts in July were down by a third on the same month last year, corporation tax was down 37.9% and there was a 10% decline in income tax, capital gains tax and national insurance contributions.
Last month, government spending was 7.5% up on July 2008, leaving the Treasury with a deficit of £8bn, compared with a surplus of £5.2bn a year earlier. The City had been expecting July – one of the four key months for tax collection – to show a small surplus. In the first four months of the current financial year, the UK was in the red by £50bn – a bigger shortfall than for the whole of 2007-08.
Stephen Lewis, economist with Monument Securities, described the first July deficit since 1996 as "a shocker" and said the deficit for 2009-10 as a whole was now likely to exceed Darling's £175bn budget forecast by "£10bn or so".
Vicky Redwood, of Capital Economics, said the figures underlined the need for "sharp tax rises and/or government spending cuts in the next few years".
She added: "At this rate, borrowing looks set to overshoot vastly the chancellor's full-year forecast. We expect a figure of at least £200bn."
The Institute for Fiscal Studies said the deficit for the first four months of the year was a poor guide to the likely total for the whole of 2009-10. It said the end of the VAT holiday would boost revenues in the final three months of the year, although it was likely that the Treasury would be denied the full benefits of the 2.5 percentage point rise by consumers bringing forward spending to late this year.
Opposition parties seized on the figures to accuse the government of losing control of the public finances. The Liberal Democrat Treasury spokesman, Vince Cable, said: "As the country fights its way through recession we are seeing a collapse in tax revenues. We are now heading for a level of deficit this year even higher than the chancellor's original predictions.
"What is particularly concerning is that the government's hopes for the recovery of the public finances are based on extremely optimistic growth forecasts. Without this growth we will be heading for even higher levels of debt."
The Conservative shadow Treasury minister Mark Hoban said: "These appalling figures are even worse than the already dire expectations. Yet the government persists in the outright deception that there is no debt problem, and that it will increase spending after the next election. By denying the scale of the debt crisis ... Gordon Brown is putting our economic recovery at risk."
• Rate will return to 17.5% from start of next year
• Annual deficit likely to exceed £175bn forecast
The Treasury dashed hopes of an extension to the government's VAT holiday tonight after the latest figures for public borrowing revealed a collapse in tax revenues and prompted City forecasts of a £200bn deficit for the whole financial year.
With the City taken aback by the rapid deterioration in the state's finances, aides to the chancellor, Alistair Darling, stressed that the Treasury could not afford the £12bn cost of the VAT cut for a second year and the tax would return to 17.5% from January 1.
Data from the Office for National Statistics underlined the impact of the recession on the government's coffers today and left Darling with no room for manoeuvre in this autumn's pre-budget report.
Business groups have been pressing for the extension of tax breaks to safeguard the economy from a double-dip recession, but Darling will insist that the government's credibility with the financial markets is more important.
The chancellor deliberately made cautious assumptions for the deficit in the budget, but the 5.6% contraction in the economy has blown an even bigger hole in the public finances than feared in April.
VAT receipts in July were down by a third on the same month last year, corporation tax was down 37.9% and there was a 10% decline in income tax, capital gains tax and national insurance contributions.
Last month, government spending was 7.5% up on July 2008, leaving the Treasury with a deficit of £8bn, compared with a surplus of £5.2bn a year earlier. The City had been expecting July – one of the four key months for tax collection – to show a small surplus. In the first four months of the current financial year, the UK was in the red by £50bn – a bigger shortfall than for the whole of 2007-08.
Stephen Lewis, economist with Monument Securities, described the first July deficit since 1996 as "a shocker" and said the deficit for 2009-10 as a whole was now likely to exceed Darling's £175bn budget forecast by "£10bn or so".
Vicky Redwood, of Capital Economics, said the figures underlined the need for "sharp tax rises and/or government spending cuts in the next few years".
She added: "At this rate, borrowing looks set to overshoot vastly the chancellor's full-year forecast. We expect a figure of at least £200bn."
The Institute for Fiscal Studies said the deficit for the first four months of the year was a poor guide to the likely total for the whole of 2009-10. It said the end of the VAT holiday would boost revenues in the final three months of the year, although it was likely that the Treasury would be denied the full benefits of the 2.5 percentage point rise by consumers bringing forward spending to late this year.
Opposition parties seized on the figures to accuse the government of losing control of the public finances. The Liberal Democrat Treasury spokesman, Vince Cable, said: "As the country fights its way through recession we are seeing a collapse in tax revenues. We are now heading for a level of deficit this year even higher than the chancellor's original predictions.
"What is particularly concerning is that the government's hopes for the recovery of the public finances are based on extremely optimistic growth forecasts. Without this growth we will be heading for even higher levels of debt."
The Conservative shadow Treasury minister Mark Hoban said: "These appalling figures are even worse than the already dire expectations. Yet the government persists in the outright deception that there is no debt problem, and that it will increase spending after the next election. By denying the scale of the debt crisis ... Gordon Brown is putting our economic recovery at risk."
