The public finances take a battering

As the FT splashes today, the credit crunch has started to bleed into the public finances. How, exactly? Well, the losses suffered by three banks – Royal Bank of Scotland, HBOS and Lloyds TSB – will result in them paying £2.5bn less in corporation tax. And that's just a small handful of the companies who will be affected by the crunch – expect further damage to tax receipts over the next few months.

The Treasury bean-counters will be worried. £2.5bn is over five percent of their forecasted corporation tax receipts for 2007-08 – and there's hardly any fiscal room to dodge a blow of that magnitude. The economy is taxed, borrowed and spent up to the hilt – something will have to give, to make up the shortfall, and Gordon Brown's now in the unenviable position of deciding what. The problem for him is that tax hikes, spending cuts and increased borrowing – however necessary – are not the best platform on which to base a political relaunch.

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