Blow to Brown as tax receipts plunge

Tax receipts have plunged at the fastest rate for a decade, according to Treasury figures yesterday that fuelled fears Gordon Brown will have to increase taxes in the Budget to fill a hole in the public finances.

Government borrowing plunged deeper into the red last month as personal and business tax revenues fell by 2.3 per cent or £3.1bn in the first 11 months of the financial year.

The Office for National Statistics confirmed this was the steepest drop since the 1992-93 financial year when the UK was emerging from recession.

Corporation tax receipts slumped almost 9 per cent compared with last year while income tax revenues were down 0.2 per cent.

The falls reflect the impact of the sharp economic downturn as corporate profits tumbled and bonuses for workers in the City of London were cut sharply.

Total receipts, including VAT and stamp duty that benefited from the boom on the high street and the housing market, rose 0.7 per cent – compared with the Chancellor's 2.6 per cent forecast.

Meanwhile spending has grown by 7.4 per cent a year, well above the Government's budget for a 6 per cent increase.

The mix of falling revenues and surging spending pushed the public finances £600m into the red last month, taking the deficit so far this year to £18.1bn.

Analysts said a shortfall in March – which tends to see high spending and low revenues – would mean the deficit will overshoot the Government's £20bn forecast.

Carl Emmerson, an economist at the Institute for Fiscal Studies, said receipts and borrowing were both on track to miss the Treasury's forecasts.

"Whether further tax increases will be required to pay for the Government's pledged spending increases will depend on whether receipts recover in the medium term, as the Treasury expects, or if the growth is less strong," he said.

The Chancellor will issue fresh forecasts for both economic growth and public spending on 9 April when he delivers his Budget.

On average City economists believe the economy will grow just 1.9 per cent this year, rather than the Treasury's forecast of between 2.5 and 3.0 per cent.

On the public finances they fear the deficit could hit £28bn in the coming financial year and £31.3bn in 2005-06 – compared with Treasury forecasts of £24bn and £19bn respectively.

John Hawksworth, at the accountants PricewaterhouseCoopers, forecasts a deficit of £30bn in the coming year, but admits £40bn is possible.

"This reflects a less strong rebound in tax receipts than expected by the Treasury, partly due to lower economic growth and partly due to lower equity prices and weak corporate profits," he said.

There was fresh evidence of the economic slowdown with manufacturing on course for its third recession in five years and retail sales growth falling to a four-year low.

High street spending fell for the second month in a row last month thanks to a drop in sales from food shops, department stores, mail order catalogues and websites.

The annual growth rate tumbled to 3.2 from 4.6 per cent making it the worst month since July 1999, official figures showed.

Ross Walker, the UK economist at Royal Bank of Scotland, said in normal times that would be a sustainable growth rate. "But the extent of the slowdown ahead of the 'triple whammy' of tax increases – national insurance hikes, frozen personal allowances and council tax rises – leaves us feeling less sanguine," he said.

Meanwhile, the Confederation of British Industry said manufacturers' expectations about future output hit their lowest levels in more than a year.

The CBI used the survey to urge the Chancellor not to use the Budget to raise money through extra taxes on business.

Ciaran Barr, the chief UK economist at Deutsche Bank, said manufacturing, where output has fallen in three of the past five months, was on course for recession.

"With most evidence pointing to a weak outcome for first-quarter GDP, we continue to look for the Bank [of England] to cut rates again within the next two months," he said.