A slump in bankers' bonuses blew a £550m hole in the Treasury's income tax take last month, official figures showed yesterday.
The drop in income tax revenues to £11.7bn – down from £12.2bn a year earlier – was put down to "the fall in financial-sector bonuses" by the Government's fiscal watchdog, the Office for Budget Responsibility (OBR).
The figures came as the Chancellor, George Osborne, was warned of a looming tax crunch as weak growth and sliding revenues jeopardised his plans to cut the deficit.
The Treasury just scraped within the OBR's target of £126bn for 2011-12 despite a grim £18.2bn in borrowing during March.
But the official numbers also revealed a revenue squeeze that bodes ill for the year ahead. Income and wealth taxes were down by nearly 7 per cent compared with March last year. VAT receipts – another big Treasury earner – sank 1 per cent to £9.4bn.
Daniel Soloman, economist at the Centre for Economics and Business Research, warned: "The fly in Mr Osborne's debt-reduction ointment will probably be slow GDP growth. This is a problem for the Government's debt-reduction strategy because slow growth goes hand-in-hand with comparatively modest tax takings. Without robust tax takings, the Government will find it difficult to reduce the deficit and its borrowing requirements."
Maintaining decent tax revenues will be crucial for the Chancellor this year as he faces an even more exacting official deficit target of £92bn from the OBR, even as the threat of a double-dip recession mounts.
Despite better recent news on the jobs market, the Government also paid out more in benefits like unemployment last month.
The bill for benefits hit £15.4bn in March, 8 per cent ahead of the same month last year.
Mr Osborne has been helped by harsher than anticipated departmental spending cuts over the past year as total spending came in at £617bn, £30bn below the OBR's forecast.
The improvement also helped the Coalition to exceed the OBR's target of slashing the UK's debt as a proportion of GDP. This fell to 66 per cent in 2011-12 – lower than the 67.3 per cent pencilled in by the OBR – although the measure has still doubled in eight years due to the impact of the financial crisis and a brutal recession.
Net debt – which passed £1trn yesterday – is set to peak at 76.3 per cent of output in 2014-15 before falling back.