Pre-Budget speculation

This year focus has fallen on government pledges to spend against falling tax receipts – a recipe, many have argued, for increased taxes to come.

It’s either that or Gordon has to borrow a stack of money to see him through. This particular bit of speculation has been fuelled by the calculation that the chancellor has a loan facility of £70bn.

That’s some overdraft and one Gordon has denied he’ll need because healthy tax revenues combined with under spending from previous years adds up to a nice £50bn rainy day fund.

But there is another reason which may explain why we don’t know the date of the PBR and why we may see higher taxes – war.

Yes, we are tottering on the brink of conflict with Iraq and the Treasury knows that war costs.

It’s difficult to put a sum on how much a conflict will cost, after no one knows how long it will last or what losses we will sustain. These days however, military planners tend to reckon on getting a fight over quickly because its so expensive. An Apache helicopter comes in at £45m while a stealth bomber could set you back £600m.

The National Audit Office estimates the 1991 Gulf War cost the UK a gross figure of £2.5bn. That was reduced to a net figure of half a billion after contributions from allies. This time though allies are in short supply so the UK may be stuck with the full cost.

Allowing for inflation a comparable war could cost upwards of £3bn, a figure not far short of 1% of total government spending. That’s a pretty big sum.

Look at it another way. A ITEM club report said a fall in tax revenues would leave Gordon £7bn short, forcing him to raise taxes if he wanted to avoid increased borrowing. Add in an extra £3bn and the likely tax increase could be even bigger.

  • Gavin Hinks is news editor at Accountancy Age.

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