Chancellor Alistair Darling’s temporary 2.5 per cent cut in VAT – intended to blunt the impact of the recession – was the biggest single factor driving the Government’s current budget £9.9 billion into the red during June, according to Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club.
Although this outcome was less bad than many City economists had expected, it still left a £34.1 billion shortfall for the first three months of the tax year, almost double that at the same stage a year ago.
That was after National Statistics had revised the current budget deficit down by £2.2 billion for April and May. Including investment projects, some of them brought forward on the orders of Prime Minister Gordon Brown, the public sector’s net borrowing last month reached £13 billion, after a £0.1 billion downward revision, against £7.5 billion in June last year.
By the end of the month, public sector net debt, once known as the national debt, had jumped to £798.8 billion, equivalent to 56.6 per cent of Britain’s gross domestic product.
A year ago it stood at £657.5 billion.
“After many years of lax control over public spending, the recession is wreaking massive damage on the public finances, setting new records for the deficit each month,” said Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club.
“We desperately need a credible plan to restore the public finances to health.
“Government spending will need to be cut more aggressively than currently planned and it will be difficult to avoid increasing the tax burden.”
Detailed numbers published yesterday showed that VAT receipts fell to £6.6 billion last month, down by 18 per cent from those in June last year, while corporation tax was down by 10.3 per cent to £1.3 billion.
On the spending side, social benefits cost 9.7 per cent more at £13.3 billion, driven by rising unemployment.
A Government spokesman said: “Today’s figures are in line with our Budget forecasts.
“They reflect the impact of the financial crisis on tax receipts as well as the action we are taking to support the economy right now and invest to benefit the recovery.”
David Kern, chief economist at the British Chambers of Commerce, said: “It would be wrong to tighten policy while the recession continues, but maintaining Britain’s international credibility requires a robust plan for restoring our public finances over the medium term.
“This must focus on curtailing public spending across the board, while avoiding damaging measures that would harm wealth-creating businesses.”
Howard Archer, chief UK and European economist at IHS Global Insight, had a similar message. “Major fiscal tightening measures will have to be introduced to get the public finances back to a sustained state over the long term,” he said.
“It is hard not to feel at least a tinge of pity for whoever is Chancellor after the next election as he is going to have to take a lot of difficult and unpopular decisions.”