• Tax revenues tend to fall during a recession
– More people unemployed – less money from income tax
– Squeeze on business profits – less revenue from corporation tax
– Decline in consumer spending – hits income from VAT and duties
– Drop in average house prices – affects revenue from stamp duty
– Possible rise in tax avoidance and tax evasion
– Cuts in bonuses and other payments e.g. overtime pay
• The latest figures for the government show a big drop in tax receipts
• These reflect the slowdown in 2008 rather than the recession
• Prospect of much worse to come in 2009-2010

Nearly £7bn down on Jan 2008

Income Tax, VAT & Corporation Tax
Current Prices, £ billion. Source: HM Treasury
175 175
150 150
125 125
100 100
75
Income tax
75
50
VAT
50
25 25
0
Corporation tax
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Reuters EcoWin

Monthly Tax Receipts for the UK Govt
£bn
30
25
20
15
10
5 5
0 0
00 01 02 03 04 05 06 07 08 09
Central Government: Consolidated Fund Cash receipts from IR: Corporation
Central Government: Consolidated Fund Cash receipts from IR: Income Tax
Source: Reuters EcoWin
20
15
10
30
25
Government' s total current receipts were
£6.7bn lower than last year, with spending
£2.8bn lower than 12 months earlier

Housing has been a boon for the government in recent years
Tax revenue from Stamp Duty
Annual tax revenue from stamp duty, £ billion
15.0
15.0
12.5
10.0
7.5
5.0
2.5
5.0
2.5
0.0
0.0
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: Reuters EcoWin
12.5
10.0
7.5

Net Profit for Manufacturing and Service Businesses
Net percentage rate of return on capital employed, seasonally adjusted
22.0
20.0
18.0
16.0
Services
22.0
20.0
18.0
16.0
14.0
12.0
10.0
Manufacturing
14.0
12.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: CBI Manufacturing Survey

Should we be worried about a reduction in tax take?
• No
– In a recession, tax revenues fall automatically – this is part of what is known as the automatic stabilisers
– Some of the reduced tax revenue comes from decisions by the government to cut taxes to boost the economy
– Some comes from lower oil/petrol prices
• Yes
– This is a sign of an economy heading into a very deep recession
– The drop in revenues is causing a huge rise in the budget deficit - public sector net borrowing is now almost three times higher than at the same stage last year
– The result will be an enormous deficit which will required either higher taxes in the future or cut-backs in government spending
– Some of the tax cuts introduced have been ineffective in increasing AD

UK Public Sector Net Borrowing
Annual borrowing, £bn at current prices
20
10
0
-10
-20
-30
-40
-50
-60
-70
-80
-90
-70
-80
-90
-100 -100
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Reuters EcoWin
20
10
0
-10
-20
-30
-40
-50
-60