Page last updated at 20:57 GMT, Thursday, 19 February 2009

Recession reduces total tax paid

Shopper at a shop which is closing
The government has collected less tax from businesses due to the recession

The recession led to a 7bn fall in the amount of tax paid by individuals and businesses in January, data shows.

Public finances, which usually rise as tax receipts come in, fell amid higher unemployment and lower company profits.

Government borrowing for the full financial year is now expected to exceed its own forecasts of 77bn.

The Conservatives said the debt burden would slow the UK economy's rate of recovery, but the government said it was committed to maintaining spending.

Treasury minister Angela Eagle said: "What would be a disaster is to cut public expenditure now... of course it's important that we return in the medium term to sustainable public finances.

"But you make the situation worse if you slash and burn at the beginning of a recession."

For the first 10 months of the financial year, total borrowing was 67.2bn, close to the government's target for the whole of the year.

Robert Chote, director of the Institute for Fiscal Studies, said that government borrowing for the full year could be "nearer 87bn."

The Office for National Statistics (ONS), which publishes the borrowing figures, also announced that the debts of the Royal Bank of Scotland and Lloyds will be included in the public finances.

It said this could add between 1 trillion and 1.5tn to public sector debt - between 70% and 100% of the UK's GDP.

And shadow business secretary Ken Clarke warned that the UK's debt burden would only get worse.

The tax take is being hammered by the recession
Howard Archer, economist, Global Insight

"We're beginning to measure the full extent of the the decline in public revenues," he told BBC News.

Rapid deterioration

The surplus in the public balance sheet fell to 8.4bn in January - a month when many firms pay tax - compared to the 15.3bn surplus in January 2008.

Government borrowing now stands at 47.8% of the UK's economic output. Last January, it stood at 42.2%.

"It's clear that public sector finances are deteriorating quite rapidly," said Amit Kara at UBS.

As as well as higher joblessness and lower corporation tax, fewer City bonuses have also contributed to the lower surplus.

"Corporation tax revenues in January were nearly 25% down on the same month last year. And much of that may be gone for good," said the BBC's economics editor Stephanie Flanders.

The temporary cut in VAT from 17.5% to 15% has also affected tax revenues.

"The tax take is being hammered by the recession," said Howard Archer at Global Insight.

And the next few months could see tax receipts falling further.

"Tax revenues were 11% down on a year ago and the situation is likely to get a lot worse over the course of the year," said Andrew Goodwin, advisor to the Ernst & Young Item Club.

Increases in benefit payments to those who have lost their jobs also increases the debt burden on the government.

Bank debt

The ONS said that it plans to incorporate the debts and liabilities of the Royal Bank of Scotland (RBS) and Lloyds Banking Group into the public finance balance sheet.

Spending will rise sharply over the coming months
Andrew Goodwin, advisor to the Ernst & Young Item Club

It said this could add between 1tn and 1.5tn to public sector debt.

But the full impact of the bail-out on the public finances will not be known until the banks are returned to the private sector.

"Profit or loss is what matters. If there is a loss it will be a lot less than these headline figures," said Mr Chote.

The government was forced to bail out RBS in October last year and now owns almost 70% of the bank.

It also provided funds to smooth the take over of HBOS by Lloyds, and now owns 43% of the combined Lloyds Banking Group.

The government needs to borrow money in order to raise funds to invest in the banks.

Despite the ever-growing debt burden, the government has made it clear that it will borrow more money if necessary in order to boost the ailing economy.

"Spending will rise sharply over the coming months... We expect the chancellor to be forced to make significant upward revisions to his borrowing projections when he presents the Budget.

"Item expects public sector net borrowing to rise above 130bn in 2009/10," said Mr Goodwin.

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