recession hits tax revenues. the collapse in tax revenues tax revenues tend to fall during a...
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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 2009-2010
The latest figures
Nearly £7bn down on Jan 2008
Main Sources of Revenue
Current Prices, £ billion. Source: HM Treasury
Income Tax, VAT & Corporation Tax
Source: Reuters EcoWin
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08b
illio
ns
0
25
50
75
100
125
150
175
GB
P (
bill
ion
s)
0
25
50
75
100
125
150
175
VAT
Corporation tax
Income tax
Revenues are seasonal
£bnMonthly Tax Receipts for the UK Govt
Central Government: Consolidated Fund Cash receipts from IR: Corporation Central Government: Consolidated Fund Cash receipts from IR: Income Tax
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09
bill
ion
s
0
5
10
15
20
25
30
GB
P (
bill
ion
s)
0
5
10
15
20
25
30
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
Annual tax revenue from stamp duty, £ billion
Tax revenue from Stamp Duty
Source: Reuters EcoWin
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07b
illio
ns
0.0
2.5
5.0
7.5
10.0
12.5
15.0
GB
P (
bill
ion
s)
0.0
2.5
5.0
7.5
10.0
12.5
15.0
The recession will squeeze profits
Net percentage rate of return on capital employed, seasonally adjusted
Net Profit for Manufacturing and Service Businesses
Source: CBI Manufacturing Survey
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
Ra
te o
f re
turn
(%
)
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
Manufacturing
Services
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
Pick a number for 2009-10
Annual borrowing, £bn at current prices
UK Public Sector Net Borrowing
Source: Reuters EcoWin
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
bill
ion
s
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
GB
P (
bill
ion
s)
-100
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
10
20
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