BUDGET 1996: Real tax rise will be at least 2.5p

Tax increases already planned by the Government, and due to be confirmed in today's Budget, will be equivalent to more than 1p on the basic rate of income tax next year and more than 2.5p in 1998/99.

A series of measures for future years, part of the tax rises announced by the Conservatives after they won the last election, add up to nearly pounds 10bn over three years. These will have to be set against the tax reductions Kenneth Clarke is expected to introduce this afternoon.

Most of the revenues will come from raising road fuel duties and tobacco duties 5 per cent and 3 per cent faster than inflation respectively. These two increases will yield extra revenues of about pounds 2.5bn next year and pounds 4bn in 1998/99.

In addition more than pounds 1bn will be raised during 1998/99 from the introduction of self-assessment for income tax and new tax arrangements for the construction industry.

"The Government has institutionalised increases every year," said Kevin Darlington, an economist at brokers Hoare Govett. "We tend to forget about these automatic rises."

The net result, even if the Chancellor does reduce the basic rate of income tax, could well be that taxation will still take a rising share of Gross Domestic Product in future years. Last year's Budget forecast that the tax share of the economy would rise from 37.75 per cent this year to 39 per cent at the turn of the century.

Norman Lamont first announced that road fuel duties would increase on average by at least 5 per cent in real terms every year, while duties on tobacco would climb at least 3 per cent a year in real terms. The decision was part of the package of tax hikes needed to close the gap in the public sector finances after the 1992 election.

In March, Mr Lamont also froze personal tax allowances and restricted mortgage interest relief to the new 20 per cent lower rate of tax. Mr Clarke, in his first Budget in November 1993, cut tax relief on mortgage interest payments further and introduced new taxes on air travel and insurance premiums.

The draconian increases were a response to a ballooning budget deficit which was then forecast to reach pounds 50bn in 1993/94. A surge in spending before the last election and the effects of the recession had put public finances on an unsustainable path.