Taxes will soar in credit crisis

The Times 21 September 2008

TAXPAYERS in Britain face up to 5p in the pound in extra taxes because of the credit crunch created by the banks, leading economists have warned.

After a week of unprecedented financial turmoil, they predict that government borrowing is about to surge as the Treasury’s tax take is slashed by a slump in earnings from the City and the downturn.

Leading forecasters say the government will soon be forced to borrow as much as £100 billion a year, giving Britain easily the biggest budget deficit of any western country.

Any tax rises would come on top of increases imposed by Gordon Brown when he was chancellor. He repeatedly raised indirect “stealth” taxes while leaving income tax unchanged. Taxes went up by 3% of national income, equivalent to more than 10p on the basic rate of income tax.
The warning coincides with news that American executives of the failed Lehman Brothers bank, parts of which were taken over by Barclays last week, will still receive millions in bonuses.

Barclays has pledged to pay $2.5 billion in bonuses and salaries to Lehman staff in New York, whose collapse brought the world’s financial system to the brink of failure.

A group of eight senior executives and 200 key staff will enjoy multi-million-pound rewards for their performance in the past nine months. A further 8,800 staff will share the remainder of the pot, with many having guaranteed jobs as part of the takeover of the US arm of the investment bank.

In Britain, by contrast, nearly 5,000 sacked Lehman staff can expect no further pay.

Vince Cable, the Liberal Democrat Treasury spokesman, said: “This is outrageous and deeply cynical. They are being rewarded for having adopted business behaviour that has wrecked their own bank. The wider public that is ultimately paying for this, let alone their low-paid employees, will be absolutely furious.”

John McFall, chairman of the Treasury select committee, said: “This is socialism for the fat cats. These people demolished institutions, yet they are walking away with security for life while others and their families have been brought to their knees.”

Gordon Brown said he was pushing the United States to help return $8 billion transferred from London to New York just before Lehman collapsed. Speaking at the Labour party conference he said: “We are asking and working with the American government to get that money back to pay salaries, not of highflying financiers but of cleaners and people who are computer operators.”

Anger over the excesses of the investment bank “fat cats” is likely to grow as the implications of the financial turmoil for ordinary people become clearer.

The Centre for Economics and Business Research (CEBR), in a report to be published tomorrow, says that borrowing will hit £90 billion next year, more than £50 billion above Alistair Darling’s forecast in the March budget. This year’s budget deficit will be £63 billion, it says, £20 billion above the chancellor’s estimate.

“Ninety billion pounds is a huge amount of borrowing,” said Douglas McWiliams, the CEBR’s chief executive. “Although there is little room to do much about it in the short term, it will overshadow public policy for many years to come.”

Its detailed calculations show that the Treasury’s overoptimistic growth forecasts, combined with the impact of the crunch on financial companies and rising unemployment, will particularly hit income tax, corporation tax and National Insurance contributions.

Britain already has the biggest budget deficit of any industrial country. A £90 billion deficit would be the equivalent of 6% of the economy, well outside the government’s fiscal rules. A deficit on that scale would hit the pound.

Though economists acknowledge that action to curb the deficit should not happen while the economy is in recession, they say the government will then face a stark choice between slashing government spending or putting up taxes.

Brown said yesterday that when HBOS hit the buffers, his first concern was for “people with mortgages who are struggling to make ends meet” and “the mother at the supermarket . . . knowing that the bills have gone up”.

He added: “When people ask what we will do to sort out the financial system and ensure there is responsibility and not irresponsibility, I tell you in three words: whatever it takes.”

Ray Barrell, senior research fellow at the National Institute of Economic and Social Research, which warned of the prospect of a tax rise equivalent to 5p in income tax, said the effects of the crisis would endure.

Investec, a City firm, forecasts that unemployment will rise by more than a million as a result of the mayhem in world markets. Philip Shaw, an economist at Investec, said: “If central banks do not coordinate a rate-cutting plan in the next few days, the claimant count could reach two million in 18 months’ time.”

Another forecaster, Capital Economics, predicts that the budget deficit will increase even more, to £100 billion, in 2010-11, posing a huge headache for George Osborne, the shadow chancellor, should the Tories win the next election.