Shamelessly Lifted From Yesterday's On Line Ft- Storm Brewing?

[Guest KingCharles1st]

I loe the bit about the treasury OVER estimating food inflation... I hope those naughty badger boys are factoring THAT concept into wage rise settlements..

Treasury sees storm clouds gathering

By Chris Giles, Economics Editor

Published: July 17 2008 23:39 | Last updated: July 17 2008 23:39

No economic downturn is good for the public finances. But the storm gathering around the UK economy appears to be the worst possible kind – at least as far as the public finances are concerned.

Economists are rapidly revising up their forecasts of government borrowing for the years to come and a £20bn shortfall – compared with current projections – appears plausible in 2009 or 2010.

Nothing is certain. The downturn is in its earliest stages and, as economists point out, the government deficit is the rather small difference between two very large numbers – government receipts and public spending. A small error in any of these forecasts translates into a big error in estimates for the public finances.

But there are several reasons why this could turn out to be, in best British Rail style, the wrong type of slowdown.

There are a number of rules of thumb for calculating the likely fate of the public finances.

One is to estimate the loss in national income that might occur. Goldman Sachs reckons the total growth of gross domestic product will be around 8 per cent in 2008 and 2009 combined. That is two percentage points less than the Treasury estimate and suggests about £15bn lower tax revenues in the next two years plus some higher social security spending.

Another technique would be to look to history as a rough guide. At current prices, the early 1990s recession saw tax revenues fall more than £30bn a year. Earlier this decade in the dotcom crash, when Britain’s economy escaped recession, government receipts were still almost £10bn lower in 2002-03 than in 2000-01.

A third way of looking at the public finances is to concentrate on the prospects for individual taxes and expenditure items. As a starting point, a 1 per cent shortfall in real national output could knock £10bn off the big taxes, according to Robert Chote, director of the Institute for Fiscal Studies.

Take oil, which might seem to offer a source of relief. Record prices will boost North Sea revenues considerably. The exchequer raised £7.8bn from oil and gas taxation in 2007-08 and with an average oil price now around $120 a barrel, the industry expects to pay £15bn in 2008-9. But even at current oil prices the Treasury is not nearly so confident.

In other volatile periods, rising wages have come to the Treasury’s rescue. Undesirable from an inflation perspective, they at least have the merit of boosting income tax revenues and National Insurance Contributions. But, with workers generally appearing to heed prime ministerial pleas for restraint, this time round big increases seem unlikely to materialise, closing off this potential safety valve. Lower than expected employment growth will also knock several billions off these taxes.

Another worrying aspect to this particular slowdown is that the necessities of life – food, electricity and gas – are seeing some of the highest price rises. That means consumers must spend a greater share of their income on items that are either low or zero rated for VAT.

Meanwhile, rising petrol prices are persuading households to drive less, undermining the projected £25.7bn from fuel duties this year.

High input price inflation, to the extent it is not passed on to consumers, will hit profits so corporation tax also looks vulnerable to current inflationary forces.

Not only are an array of forces depleting the tax base. Public spending will also rise automatically as social security benefits and tax thresholds go up in line with September’s RPI figures – exactly the month when many economists expect the index to be close to its peak.

Malcolm Barr of JPMorgan expects RPI inflation to be 5.2 per cent in September compared with the Treasury’s Budget forecast of 3.25 per cent, enough to add £3bn to social security spending and reduce tax revenues by £1.5bn.

The halving of housing transactions will threaten £5bn of stamp duty receipts, while falling asset prices will depress capital gains tax. If the early years of this decade are any guide, another couple of billion could be lost here.

The government has already increased income tax allowances to offset the row over the abolition of the 10p tax rate and postponed the rise in fuel duty but it is being urged to do more.

Mr Chote said on Thursday that the pressure was on for a £5bn giveaway in the autumn, joking: “The Treasury was the department that used to say ‘no’, but now says ‘yes.” Add it all up and a potential hit to the Exchequer of over £20bn appears possible. Michael Saunders of Citi said he expected the fiscal deficit to rise to 5 per cent of national income, about £75bn.

Such predictions – not quite as bad as the early 1990s recession but terrible compared with Labour’s record and rhetoric – seemed alarmist a few months ago. Now they appear all too plausible.

[Guest DissipatedYouthIsValuable]

Add £3Bn to social security spending?

How much was added to the money supply to keep banks afloat?

Edited July 18, 2008 by DissipatedYouthIsValuable

[29929BlackTuesday]

Not 'on message' is it, this report?

Have you not noticed the organised 'rose-tinted spectacles' campaign going on at the moment?

Please re-post with an article that says something like:

"Economy back on track" or "Green shoots of recovery"

[interestrateripoff]

Falling tax receipts, I wonder which numpty moved this country from direct taxation to indirect taxation??

Great when consumer spending is booming puts you in the sh*t when consumers stop.

[hpc-craig]

Public spending will also rise automatically as social security benefits and tax thresholds go up in line with September’s RPI figures – exactly the month when many economists expect the index to be close to its peak.

Looks like we are far from the peak of rising prices if 'economists' are predicting the peak in september.

[Mr Nice]

Falling tax receipts, I wonder which numpty moved this country from direct taxation to indirect taxation??

Great when consumer spending is booming puts you in the sh*t when consumers stop.

actually, I think the opted for "all of the above"