Broke Britain lives now, but must pay later

Revenues from privatisation and oil have disguised Britain's poor public finances for years. If borrowing targets are to be met into the next century, politicians will have to either raise taxes or severely shrink the Welfare State
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Britain's public finances ares still in a bad way, according to official figures. Over the years the Government has cut taxes without holding back its spending, using privatisation revenues and North Sea oil to disguise the position.

But, in the short term, Kenneth Clarke is probably going to strike it lucky with the booming economy helping to trim the Government's month- by-month borrowing figures. There is little danger that the state of the public finances will prevent the Chancellor reducing income tax by a penny or two in next month's Budget.

The short-run improvement will help politicians avoid really difficult questions during the election campaign. Andrew Dilnot, director of the Institute for Fiscal Studies, which co-produces the annual Green Budget, said: "The real challenge is the long-term balance between public and private sector activity."

He does not think there is a danger of the incoming government having to raise taxes soon after the election, as long as the pace of growth holds up as expected next year. "As long as there is nothing outrageously profligate in this Budget, the Government's fiscal position looks ... reasonable," he said.

According to the Treasury's latest published forecasts, the public-sector borrowing requirement - the gap between public expenditure and tax revenues - will be pounds 26.9bn in the current financial year and pounds 23.1bn next year. This 1997 shortfall would be just low enough for Britain to qualify for the European single currency.

Other economists reckon these forecasts are on the cautious side, the Treasury having been stung by criticism of its earlier over-optimism. Revenues from corporation tax and value-added tax in the year to March turned out to be pounds 3bn lower than predicted only a few months earlier, perhaps partly because of companies' growing skill at avoidance measures.

Since March, tax revenues have been rolling in thanks to the recovery. The Budget is likely to show future borrowing that is the same or better than the last Treasury forecast, with government finances balancing by the turn of the century.

The big question, however, will be whether this government and the next can deliver on tough spending plans. The existing plans call for little growth in real terms in public spending, with its share of gross domestic product falling from 42 per cent last year to less than 39 per cent in 1998-99.

This requires the public sector to turn on a sixpence and reverse the trend of the past half century. As Mr Dilnot puts it: "I think the Chancellor will announce very tight spending plans. If they are to be hit, there will be a great deal of pain in the public sector, with a complete rethinking of public provision. If they are not hit, taxes will have to go up."

The party political jousting next month will focus on the headline cuts in income tax in the 26 November Budget. But the hidden agenda is the shape of government we are willing to pay for in the next century.