Spending forecast grim as City tax take shrinks

The plunging City tax take has hammered the public finances - and UK plc probably can't plug the gap...

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Last Updated: 06 Nov 2012

The amount of tax paid by City firms has more than halved in the last two years, the Government revealed today – leaving the public purse over £35bn worse off. Despite UK plc starting to show some signs of life again (Cadburys has reported an impressive set of results today), it’s clearly going to take years for the City to recapture its former glories, if indeed it ever does. In the meantime, there’ll be a big hole in the tax take. So it’s hardly a surprise that the Government is finally starting to talk about a block on public spending…

In response to a question in the House of Lords, the Treasury admitted that the City tax take shrunk to £32.5bn in the year to March, some 52% less than the £67.8bn it paid into the Revenue’s tax coffers two years earlier. Given that this was the worst year for the City in living memory, with many institutions plunging to huge losses and jobs and wages slashed across the sector, that’s actually still a pretty vast sum – enough to cover the entire defence budget, for instance. But it’s also a massive drop. A couple of years ago, the City was apparently the source of £1 in every £7 contributed to HMRC’s tax coffers. Now it’s about half that.

And the bad news for the taxman is that it’s unlikely to make up this shortfall elsewhere. Some big companies seem to be doing pretty well – Cadbury said today that its sales jumped 12% in the first half of 2009, thanks to the new ‘stay-at-home culture’ and some effective cost-cutting. There are even some signs of recovery in the City: Goldman Sachs recently reported bumper profits, and today Santander’s UK business – i.e. Abbey and Alliance & Leicester – said revenues were up 20% in the first half. (Pity Spanish shareholders are the principal beneficiaries – though since we also sold them BAA, which said today that losses tripled during the same period, perhaps we’re all square). But the recent losses will probably be off-setting tax bills for years to come.

As the questioner (UKIP’s Malcolm Pearson) intended, these figures illustrate just how important the City is to the UK public finances. This suggests two things: one, that we should be careful what we wish for with the current City-bashing – driving all the bankers to Geneva might make Square Mile wine bars nicer places to drink, but it’ll probably mean we can afford fewer trains, schools, hospitals and soldiers. And two, since the Government has relied so heavily on this income for its decade-long splurge, it clearly has no choice now but to rein in spending. Even Peter Mandelson admitted as much yesterday, in a Newsnight interview. Better late than never.


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