Covid creates huge slump in tax revenue

‘Our health emergency is not yet over,’ the Chancellor of the Exchequer said yesterday. ‘And our economic emergency has only just begun.’

Facing the steepest downturn since the Great Frost of 1709 – a slump in output of 11.3pc – rishi Sunak said he was ready to spend, spend, spend to drag the country through the coronavirus crisis.

The numbers are indeed eye-watering, with spending due to top £1 trillion for the first time this year.

However, a detailed look at the figures from the Office for Budget responsibility (OBr) reveals that it is not just emergency Covid spending that has devastated the public finances, but also a perilous collapse in tax receipts.

As the economy has shrunk, so has the Government’s ability to raise taxes as businesses have been hammered by the pandemic and individuals forced to stay at home.

According the OBr tax receipts will be £771bn for 2020, almost £102bn lower than predicted in March.

The shortfall shows the extent to which every area of the uK economy has been dented as businesses up and down the country have been forced to scale back operations and workers have either lost their jobs or taken pay cuts. taken pay cuts.

The biggest damage will come from VAT, business rates and income tax receipts.

The OBr says that the Government’s VAT receipts will be £24bn lower than previously thought as High Streets now resemble ghost towns. The Chancellor has also slashed VAT on the hospitality industry, from 20pc to 5pc, until March.

Income tax is set to come in £19.3bn lower as unemployment soars and earnings plummet. Likewise, national insurance contributions will be £9.4bn lower.

Corporation tax receipts are set to slide by £14.3bn due to businesses running up losses, while air passenger duty is anticipated to be £3.6bn lower as fewer people go on holiday or travel for work. Fuel duties will fall short of predictions following the growing trend in home working.

Even the usually reliable property sector has failed to cough up for the Treasury after the housing market was put in the deep freeze during lockdown before Sunak announced a stamp duty holiday in July. The only areas of joy for the Chancellor and the Treasury will be income from cigarettes and alcohol despite the closures of pubs and restaurants.

More people drinking at home has boosted alcohol sales in supermarkets and local shops.

The OBr added: ‘Duty receipts will shift towards wine and spirits sales in future, for which a larger share of purchases is in supermarkets and other shops.’

But the tax take will recover only slowly over the next five years. In total, tax revenues over the five years from 2020/21 to 2024/25 will be around £350bn lower than assumed in March.

The OBr pointed out that some sectors will recover at a slower pace than others, in particular the airline industry.

It added: ‘We expect passenger numbers to recover gradually, reaching pre-virus levels by 2024.

‘The recovery in airline taxes will depend on the duration of the restrictions on international travel here and abroad.’

Experts have warned that there is no room to raise taxes to fill the coffers.

Mark Littlewood, director at the Institute of Economic Affairs, said: ‘This was a black swan event. Tax receipts shows what happens when a government locks down a whole economy and GDP falls 11pc.

‘He can’t squeeze the private sector any further as people have already taken big salary cuts or lost their jobs.’

He believes Sunak must take the unpopular option and cut public sector spending and promote hiring in the private sector. He added: “This will be a jobs-led recovery. There are 2m to 3m unemployed and they must be reallocated. A cut in income tax or national insurance must be considered.”

Should Sunak try to follow the tax rise path he will face stiff opposition from Conservative MPs with the former Cabinet Minister John redwood among those who have openly opposed the idea.

Matt Kilcoyne, director at the Adam Smith Institute, said: ‘Tory backbenchers wouldn’t accept it and they’ve grown more independent in recent months.

‘They know who their voters are – independent small business owners, most of whom are fearful for their jobs.’