25th November 2011
In this piece Blerina Uruci, an economist at Barclays Capital says: "Current receipts continued their recent strength despite the slowing economy. The increase in receipts compared with a year ago was a result of higher VAT and social contributions receipts, while taxes on income and wealth were weaker. Although higher tax receipts were to be expected given the rise in the VAT and national insurance rates, the strength is somewhat surprising given the worsening macroeconomic conditions."
This is not just a one-off. As these stats show, tax take in the UK economy is almost back to pre-recession highs: 2007/2008 was the peak year for tax receipts at £451bn. The next year the recession began to bite and the overall tax take dipped to £439bn and then £408bn. This year it has been back up to £447bn.
This also highlights the dilemma for governments. For every year that the Government only raises £408bn, and doesn't cut spending, it is left with a £43bn hole in the economy, even assuming it had balanced its books to start with. The graph on this site shows how quickly apparently manageable debt levels can spiral out of control when tax receipts fall. Debt levels were stable at around 35% of GDP until as recently as late 2007.
But where are the most important areas for the Government? The heavy-hitters in terms of tax revenues are income tax, national insurance and VAT at £153.5bn, £96.5bn and £83.2bn respectively. Corporation tax is a relatively lowly £42.1bn, though corporations will pay NIC as well. Fuel duties are an increasingly chunky part of Inland Revenue coffers at £27.2bn.
It is VAT and Corporation tax revenues that are hardest hit in a recession. VAT receipts have held up well recently because of the increase in rates from 17.5% to 20%, though stable retail sales and higher inflation have also contributed. Capital gains tax has also halved from its highs, but at £3.6bn, it is not a significant revenue generator for the government.
This year saw the first contribution from the bank payroll tax, which brought in an additional £3.6bn. An improvement in the banking sector represents another potential source of revenue for government. It not only means that any guarantees put in place will not need to be used, it also means that the government will be able to recoup some of its original financial outlay.
One of the key conclusions from this document is as follows: "Expenditure, in contrast, went up much more, by around four points of GDP. Furthermore, while the expenditure-to-GDP ratio increased significantly in almost all countries, the picture on the revenue side was much more contrasted: in about one fourth of countries, the drop of revenue was significant, approaching 2 % of GDP or more, whereas more than one third of countries actually increased revenues, as a share of GDP."
In other words, tax revenues are more stable than spending. Excessive spending has contributed significantly more to the current debt crisis than a weakness in tax take as a result of recessions. This is why cutting spending has been the priority for governments and some have been willing to take a risk on growth to achieve it.
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