Plummeting equity prices could cost the Treasury billions of pounds, making it more difficult for chancellor George Osborne to meet his target of achieving a fiscal surplus by the end of the decade, a leading think tank has warned.
In its annual Green Budget publication out today, the Institute for Fiscal Studies (IFS) said that equity prices had fallen by 7.5 per cent between the November 2015 Autumn Statement and the end of last month. According to economists at the IFS, if equity prices remain 7.5 per cent below the OBR's latest forecast, capital tax receipts could take a hit of around £2bn.
The OBR forecasting model assumes that equity prices will grow in line with nominal gross domestic product (GDP).
"Developments since November 2015 suggest that the outlook for equity prices (and thus revenues from capital taxes that depend on equity prices) seem biased to the downside," IFS economists wrote in the Green Budget.
"Equity prices significantly affect the public finances. If the falls in equity prices seen since the OBR published its last forecast in November are not reversed before March, this will depress the outlook for receipts."
Equity prices affect government receipts from capital taxes, namely capital gains tax, inheritance tax and stamp duty on share transactions.