Falling Tax Revenues Are About To Balloon Our Budget Deficit

[cashinmattress]

Falling tax revenues are about to balloon our budget deficit

Yesterday's instalment of Prime Minister's Questions made clear that we are at the start of a lost year for policy-making. Real decisions, real debates are now off the table. We are left instead with dreary volleys back and forth: "You're cutting spending." "No, you're cutting spending."

This debate is as meaningless as it is pointless. Meaningless because, as anyone who has examined the figures knows, both parties are planning to cut spending in real terms after the election: the only differences are over the timing of the changes, and the departments that will be the biggest victims. And pointless because neither the markets nor, one presumes, the voters are taking much notice. Now that the pre-election marathon is on, no one – not Standard & Poor's, which rates Britain's creditworthiness, not economists calculating their forecasts, not bankers and hedge fund managers – is taking anything either party says seriously. We are in an economic limbo.

Admittedly, this happens before every election. What makes it so dangerous, however, is the timing. As the Bank of England, the Bank for International Settlements and others have pointed out in the past week, we are at a point of extreme vulnerability, both for the economy and the financial system that underpins it.

Indeed, the rather pathetic shadow-boxing between Gordon Brown and David Cameron skirts neatly over the big issue, for which the party leaders have neither an explanation nor a solution. Britain's immediate fiscal crisis – the massive deficits that threaten to cripple the economy in the coming years – is a consequence not of incontinent spending but of a sudden collapse in tax revenues. The debate should not revolve solely around how to make cuts, but also over how to compensate for that forgone tax.

Public spending increases – in terms of central government expenditure – have shrunk dramatically in the past half-decade. The annual growth rate dropped from a peak of almost 8 per cent to barely more than 1 per cent. Expenditure can (and should) be trimmed further: waste can be cut, and the looming pensions and benefits black holes addressed. However, spending growth is as nothing compared with the unprecedented collapse in tax revenues in the wake of the economic crisis.

With the exception of the dotcom bust, the amount of cash flowing into the Government's vaults grew by around 4 per cent a year over the past decade. Since 2008, those revenues have been shrinking at an annual rate of almost 10 per cent. This is the main reason why the budget deficit is about to rise to levels unprecedented in peacetime.

Such revenues fall for two reasons: because you cut tax rates, or because profits and earnings fall. No prizes for guessing which accounts for this collapse. Companies are making less, people are being paid less, and consequently the amount of tax they pay is down.

This happens in every recession – but this recession, as one can never repeat enough, is different. The financial system, which has for years been Britain's golden goose, generating corporation and income tax receipts to die for, is a shadow of its former self. Even the banks making money will be able to offset several years' worth of profits against the losses incurred in the crisis. Even if the economy recovers, these tax revenues are not coming back for a long time.

A telling chart from a recent Organisation for Economic Co‑operation and Development report on the world economy dissected the increases in government deficits. Whereas most other countries' books were plunged into the red because they were spending more in fiscal stimulus packages to mitigate recession, or on unemployment benefits for laid-off workers, the biggest chunk of Britain's deficit was caused by the disappearance of City-related taxes.

So the politicians may rattle on about spending, but they are missing the point: we are trying to fund a public sector with a tax income that has shrunk by a tenth – perhaps permanently. Some of the divide will be bridged through spending cuts, but a far greater difference could be made by reconsidering how we collect taxes (and no, that doesn't mean increasing them).

One idea, floated this week by George Osborne, is to end the tax deductability of interest payments on debt. Another might be to tax company turnover rather than profits – which would stop tax receipts rising and falling with the business cycle. More importantly, we have to devise policies that simultaneously ensure that we are no longer as reliant on one sub-sector of the economy, and nurse the productive, less speculative elements of the financial industry back to health.

This is a debate we need to have – but instead, we get this mindless politicking about public spending, with each party grossly caricaturing the other's plans. Perhaps the vacuum where discussion should be suits the politicians. Perhaps they assume their voters are too stupid to understand the dilemma. If so, they are making a big mistake.

Both Cameron and Brown are a pair of dickheads. There is no way out of this mess without them first getting honest with the country and forcibly ending the credit 'wealth' façade.

Tough love.

[OnlyMe]

The public have seen how much they have been defrauded by the banksters and politicians.

Expect willingness to pay tax to plummet and an attitude to commit fraud/embezzlement etc themselves to balloon beyond anything seen before. For banksters, it was keeping their profits and getting the taxpayer to pay for the gambling losses, for millions of others it will be a matter of food on the table.

[council dweller]

The public have seen how much they have been defrauded by the banksters and politicians.

Expect willingness to pay tax to plummet and an attitude to commit fraud/embezzlement etc themselves to balloon beyond anything seen before. For banksters, it was keeping their profits and getting the taxpayer to pay for the gambling losses, for millions of others it will be a matter of food on the table.

Yes, you are 100% spot on guaranteed.....spot oned to the max etc.

When this happens things will spiral down at a rate of knots. It will be spivtastic.

[Mega]

I can only speak for my own little engineering company in Liverpool, but i had no work for 7 weeks now.................just how much Tax does Gordon think he be getting from me?

Mike

[cashinmattress]

I can only speak for my own little engineering company in Liverpool, but i had no work for 7 weeks now.................just how much Tax does Gordon think he be getting from me?

Mike

Not much me thinks...

[wonderpup]

The public have seen how much they have been defrauded by the banksters and politicians.

Expect willingness to pay tax to plummet and an attitude to commit fraud/embezzlement etc themselves to balloon beyond anything seen before. For banksters, it was keeping their profits and getting the taxpayer to pay for the gambling losses, for millions of others it will be a matter of food on the table.

Yep- it's hard to see why people will remain willing to play the game honestly when they see their supposed social betters getting away with wholesale graft on an epic scale. The entire moral credibility of the sysytem is broken. So when you see those ads about how they've got an army of snoopers tracking down benefit cheats, it's hard not to wonder why they don't have another army of snoopers tracking down bloody bankers and clawing back some of that massive unearned income they have stashed away.

A truly pathetic state of affairs.

[Mega]

Mean while

http://www.youtube.com/watch?v=RIPSrKbYp0U...player_embedded

Mike

[ajay]

I can only speak for my own little engineering company in Liverpool, but i had no work for 7 weeks now.................just how much Tax does Gordon think he be getting from me?

Mike

You mean you have had no money in for 7 weeks, how long can the company survive.

[CokeSnortingTory]

The thing that bothers me is that I've long believed that at some point the government, no matter what party, will have to axe benefits.

And there are all these people out there, worrying about their jobs, but thinking, "oh well, if the worst comes to the worst, I'll have to sign on and get benefits......."

[OnlyMe]

Mean while

http://www.youtube.com/watch?v=RIPSrKbYp0U...player_embedded

Mike

Cap N Trade is the doomsday for US manufacturing, it will be the low punch that will knock it out completely on the face of it, unless it is a front for outright protectionism. Ron Paul has had a few words about it too. IT's tax, but there will be nothing left to tax if they enforce it.

[Dr Doom]

The thing that bothers me is that I've long believed that at some point the government, no matter what party, will have to axe benefits.

And there are all these people out there, worrying about their jobs, but thinking, "oh well, if the worst comes to the worst, I'll have to sign on and get benefits......."

This concerns me as well.

A recent thread pointed out that benefits expenditure has (just recently)

exceeded income tax income for the government.

Of course this isn't the full equation.

But the trend is very concerning. The deficit between government outgoings/income

will be made up by printing bonds & selling them to the boe for brand new cold hard cash

which needless to say will be inflationary for the general economy.

[Mega]

You mean you have had no money in for 7 weeks, how long can the company survive.

About 3-4 years..............I F8cking saw it coming 10 years ago!

Mike

[enrieb]

The thing that bothers me is that I've long believed that at some point the government, no matter what party, will have to axe benefits.

And there are all these people out there, worrying about their jobs, but thinking, "oh well, if the worst comes to the worst, I'll have to sign on and get benefits......."

Without wishing to start an inflation/deflation standoff, but isn't Inflation the simplest method for lowering the level of benefits. Cutting benefits directly would lead to riots.

http://news.bbc.co.uk/1/hi/business/8127583.stm

Costs hit low-income households

The cost of living for those living on minimum household budgets is rising faster than inflation, the Joseph Rowntree Foundation has calculated.

It says that the costs for a single household on its low-income budget were up 5.3% this year, with rises of 5% for pensioners and couples with children.

The reason is that the poor spend more on fuel, food, and public transport, which have risen by 7% to 12%.