Corporation tax black hole raises spectre of further cuts

A slump in corporation tax receipts in October has knocked the Government’s deficit reduction plans for this year further off course.

It also raises the likelihood that the Chancellor will be forced to outline further cuts and scrap part of his Fiscal Mandate in his forthcoming Autumn Statement.

Figures from the Office for National Statistics released today showed that public borrowing came in at £8.6bn in October, £2.7bn higher than the same month last year. Over the first seven months of the 2012/13 financial year the Government has borrowed around £5bn more than it did over the same period of the previous year.

Analysts said that if that trend continues the Treasury could borrow between £10bn and £15bn more than expected by next March. That would push total borrowing for the financial year to between £130bn and £135bn, stretching the deficit close to the levels reached in 2010-11.

The Treasury’s fiscal watchdog, the Office for Budget Responsibility (OBR), will rule on the 5 December whether the Chancellor is still on course to hit his Fiscal Mandate of eradicating the structural deficit within the next five years and reducing the national debt as a share of GDP by 2015-16. If, as widely expected, the OBR finds that the outlook has significantly worsened Mr Osborne will be compelled to outline more savings to hit those targets. Some City economists believe Mr Osborne would drop the rule on the public debt share of GDP rather than impose further cuts to take effect within the next three years.

“If he is forecast to miss his secondary rule, he may prefer to adjust the rule” said Vicky Redwood of Capital Economics.

The public finances deterioration in October was driven by a slump in corporation tax revenues, which fell by almost 10 per cent on the year. Government spending also rose by 7.4 per cent as social benefits outlays jumped. The Treasury said that the corporation tax take in October – normally a bumper month for receipts – was artificially suppressed because of problems experienced by North Sea oil companies this year.

But there were other signs of economic weakness are feeding through to the public finances. Though VAT and income tax receipts both rose on the year in October, over the financial year they are still growing by less than the OBR predicted in March. VAT receipts are up 1.9 per cent over the past seven months and income tax receipts are flat. The OBR is forecasting the former to grow by 4.4 per cent and the later by 1.3 per cent over the whole year, meaning that there would have to be a rapid acceleration of receipt growth over the coming months to hit those targets.

The economy emerged from recession, registering surprisingly strong growth of 1 per cent, in the third quarter of 2012. But a number of economic surveys have since pointed to a slowing of activity and the Bank of England warned last week that the economy could contract again in the final three months of the year.

A spokesperson for the Treasury said: “The economy is healing, but it still faces many challenges. These numbers illustrate that, but also show the government’s plans to bring spending under control are on track for the year.” But Labour’s shadow chief secretary to the Treasury, Rachel Reeves, said the chancellor was borrowing billions more to pay for the cost of his economic failure. “Having failed on jobs and growth, the government is now failing on the deficit too,” she said.

The OBR cautioned that it was still too early to judge what the full government borrowing over the year would be. “While it looks likely that receipts growth will fall short of our March forecast, much will depend on the performance of the real economy and inflation over the remainder of the fiscal year” it said in a statement.