A TOTAL of £92 million will have to be drawn from the government’s Reserve Fund over the next four years to balance its books. And the government’s reserves as a whole will be depleted by £220 million at the end of the four years.
Total tax receipts for 2012/13 are forecast at £485.6 million, a drop of 9.4 per cent over the current year’s estimate.
This is largely the result of the UK’s raid on our VAT revenue, but also the impact on Exchequer income of historically low interest rates.
However, government net spending, which is the amount that has to be funded by direct and indirect taxation, is to increase by £6.3 million, or 1.2 per cent, to £539.5 million – although that figure is £35 million less than had originally been forecast for the year.
To shore up the shortfall, and in spite of what Treasury Minister Eddie Teare MHK Teare described as ‘considerable progress being made to reduce departmental budgets’, it will be necessary to transfer £55 million from reserves in order to balance this year’s budget.
It’s the first time since the early 1990s that tax receipts have failed to match government spending.
With the second VAT renegotiation resulting in £75 million loss in revenue by 2013/14 (£50 million in 2012/13), the aim is to rebalance public finances over a period of four years, using a total of £92 million from the Reserve Fund, which stood at £401 million at the end of last year.
The biggest draw on reserves – £55 million – will come in the forthcoming financial year, followed by £31 million in 2013/14 and £6 million in 2014/15 with no further withdrawals in the years thereafter.
In his Budget speech, Mr Teare said: ‘We are extremely fortunate to have reserves in excess of one thousand million pounds, built up over decades by the cautious fiscal policies adopted. It is not my intention to spend this inheritance in a rash manner.’
The government has three types of reserves – the Reserve Fund itself that currently contains £401 million, the Capital Fund which has £72 million in it and the internal reserves which between them have £110 million.
Over the next four years, £92 million will be taken out of the Reserve Fund to balance the books, while the Capital Fund will be down to zero and the internal reserves will be down by £55 million.
But Mr Teare said that even after the end of the rebalancing exercise, the government would still have 60 per cent of its current level of reserves.
‘We will still have a substantial cushion,’ he told reporters at a Budget press conference on Monday.
When the first revision of the VAT agreement was announced, it had been expected that the government would have to use its reserves to balance the Budget. In the event, the books were balanced without the need to dip into the rainy day fund.
Following the second VAT raid, however, which will see government revenues cut by a third from next year, use of the reserves was always going to be inevitable.