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Your Money > Family Finances Articles > Why your taxes...
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By Sarah Modlock
"In this world nothing can be certain - except death and taxes," a certain Benjamin Franklin once said. With hindsight, he might have added a third item - "banking bailouts" - to the list. Amid the Chancellor's bluster about tax cuts to sweeten voters and taxpayers' worry about public services being slashed, all we really want to know is what the financial hangover will cost. The answer is quite possibly between 6p and 7p in every pound. A report published today says that all taxpayers may be forced to fork out over £800 a year more because the Government is running out of money. This comes after claims in the House of Commons on Monday that the latest banking bailout, worth a total of £3 trillion, equates to £50,000 per person in the UK, according to the Daily Mail. Throw in a research from the business group, the CBI, warning that Britain would have to borrow almost £100bn more than previously forecast to bring the recession under control, and this week's prediction by the British Chamber of Commerce that 3.2 million people - or 1 in 10 of the total workforce - will lose their jobs, and it's not hard to see why tax rises are becoming a question not of if, but when. Given that in less than three weeks the estimates of Treasury have virtually doubled, and could rise yet further if it decides to come to the aid of Barclays, it could be sooner rather than later. At the end of last month, after the Government stepped into to rescue floundering giant RBS, the National Institute of Economic and Social Research estimated that the black hole in Treasury revenues was worth £14bn. Over the weekend, it was at it again, this time to the tune of another £260 billion for Lloyds. As a result today's report, from accountancy firm Pricewaterhouse Coopers, predicts the hole is as much as £25 billion. It recommends that Government expenditure be frozen for the next three years, amd tax rises introduced from 2011 in order to pay for it. With there likely being a further two Budgets between now and the next general election, there is plenty of time and wriggle room for the government when it comes to the jaw-dropping bill taxpayers face for the financial crisis. Behind the gloomy figures are...ooh, more gloomy figures. Specifically, the scale of the Bank of England's Special Liquidity Scheme (SLS). This was launched last April and was a way for banks to swap temporarily their 'overhang' of mortgage business - described as 'toxic assets' - for gilts to give them a breathing space. The SLS was closed at the end of last month but the scale of its use demonstrates how severe the funding crisis has been. In total, 32 banks and building societies packaged up £287bn of mortgages to swap for gilts over the nine months it was in operation. This is thought to be five times more than the Bank predicted when it set up the SLS. How much debt are we in? That, my friend, is part of the mystery. We know that Northern Rock and Bradford & Bingley belong to us, along with around 65% of Lloyds Banking Group and around 80% of Royal Bank of Scotland. However, the Chancellor refuses to put a figure on the potential cost and the highly respected Treasury Select Committe has issued a highly critical report and told him he must come clean. It says the Treasury should behave like a public company and publish detailed accounts of its liabilities at least every three months, instead of once a year. So is a tax rise inevitable? Well if the economy picks itself up quickly and the banks that have taxpayers' money turn big profits, then no. In reality, it's looking likely and not just because of the bank bailout. Public finances were already under increasing pressure and spending has run ahead of tax receipts for years which, unfortunately, makes tax rises inevitable. Once the economy slows and unemployment rises, then there is less tax coming in and more benefits being paid out. In October last year, Alistair Darling admitted that taxes will rise and public spending will be cut whoever wins the next election. In a speech to the City he said the government was ripping up their financial rulebook to allow them to borrow billions of pounds for public projects but warned that in the "medium term", around three years, the Government of the day will have to take tough measures to balance the books. But last month, Peter Mandelson warned Labour not to impose big taxes on the wealthy as it would be the "politics of envy". He admitted there was a "tension" in the Labour party over tax. He said: "I think there is a tendency during the downturn to make the incomes of the wealthy a proxy for fairness, [to think] that if we are reducing the incomes or the wealth of the wealthy that it is somehow making us a more fair society. It is very important that we don't get ourselves into thinking that tax and tax on the highest paid in our society is a litmus test of social justice." Mandelson insisted that he had supported the decision to raise the higher rate of income tax from 40% to 45% in last November's pre-budget report, saying it was necessary to "rebalance" the public finances in the medium term. Can't we just let the banks go under? I know lots of people feel this way. An unimaginable amount of money has been spent propping up banks that many ordinary people believe were playing fast and loose with capital and business models. There is also the question of how they were allowed to keep doing it. But if the banking system collapses entirely, the public purse will be in trouble anyway because most or all bank deposits would have to be covered by the taxpayer. But hey, on the bright side, the Bank of England's liquidity scheme could end up in profit meaning the taxpayer would get a boost in the form of interest payments and fees. Are there any alternatives left? The short answer is no. With government effectively ring-fencing and guaranteeing the bad debt, introducing quantitative easing (where the Bank of England loosens up the flow of money between banks), and Interest Rates unlikely to fall any further from their current mark of 0.5%, most commentators agree that this is the last throw of the dice. Nonetheless, it's still hard to see why the taxpayer should be saddled with a bad bank, or bad debt - or how this would cost much less than the bailout already has. Will our taxes go up any time soon? Not if Gordon Brown has anything to do with it. He'll want to ensure that any nasty tax rises and unpopular public service cuts will be down to the next government, whichever party forms it. But the more money that needs to be earmarked to save the banks from going under, the more likely the timetable will be pushed forward - whether the Government likes it or not. Useful links: |
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