A little finesse from Dr Feelgood

Economics

BUDGET time is a-coming up, and like any business pondering grand strategic decisions about its future, this means the Treasury team getting away for a day or two in the country to talk about it. Thus, although the Budget itself in not until 28 November, the broad options will be considered this weekend at Dorneywood, the country house used by the Chancellor.

This year, the process is more overtly political than usual. It may not be the last Budget before the election, but it is certainly the penultimate one, and there are two powerful practical reasons for wanting to run the two Budgets in tandem. First, the lags in economic policy are quite long, so in as far as a Budget affects the economy, this is the one which will determine conditions for the 18-month run-up to the election. And second, the condition of public finances in the second year will be determined in large measure by the Budget in the first. The Chancellor has, so to speak, to line up his election shot. So this is the one to get right.

But what does "getting right" mean? Most of the public discussion about the Budget has been in terms of the supposed trade-off between taxes and interest rates: the greater the tax cuts the greater the element of distrust in the markets and accordingly the less likely the next move of rates would be down. Public spending is - rightly in the short run - seen as a given.

There is a deal of sense in this sort of discussion, for the basic maths of the Budget is not affected by the political process. The problem for a government with a looming election is that this year the maths is somewhat less favourable than it looked even six months ago. There is no catastrophe, but growth is running a little lower than forecast and inflation a little higher. As a result of the first, tax revenues are below target, and can be expected to run further below target during the coming fiscal year. As a result of the second, many payments (in particular those linked directly to the retail price index) will tend to run a bit above expectations.

The outcome is that forecasts for the Public Sector Borrowing Requirement next year suggest the Chancellor will be working with a deficit of about pounds 27bn, instead of the projected pounds 21bn. This does not eliminate the possibility of tax cuts because the markets accept that a few billion either way is not very important. All PSBR forecasts have to be vague, because the PSBR is the difference between two very large numbers: that pounds 21bn figure is the gap between receipts of pounds 278bn and spending of pounds 302bn, less a small amount of borrowing by public corporations. But the fact that the figure is worse than forecast, rather than better, does to some extent limit the scope for action. The market view that net tax cuts cannot safely be above the pounds 2bn-pounds 3bn range is probably right.

You can see the political problem. The Government is able to take in tax about 1 per cent less than the number it first thought of; not an exciting prospect in itself, and one little helped by the prospect of a further couple of percentage points coming off taxation in spring 1997.

So what will be the tenor of the discussion over the weekend? Aside from basic analysis of the economy, monetary conditions, the state of public finances and all that, the talk will, I think, be of how to get the biggest bang for the buck. This means constructing a tax-cutting package that is modest in size but which can seize the imagination of the voters and push forward the frontier of tax-cutting so that Labour will have to commit itself not to reverse its main elements. I do not think, contrary to City talk, that there will be much discussion of the interaction of fiscal and monetary policy. The direction of interest rates 12 to 18 months hence is not going to concern a canny Chancellor who is not in any case completely sure that the Government will get to spring 1997.

And what constitutes the biggest bang? There will, I expect, be two main elements to the tax-cutting package.

One will be the abolition of a tax. That gets the headlines and puts Labour on the spot: would the opposition reintroduce it?

The obvious candidate is inheritance tax. It does not bring in a great deal of money in public finance terms; it is easy for the financially sophisticated to avoid, but catches the unsophisticated. Abolition would be popular not only with the elderly, but also with their heirs. The changing age structure of the country will increase the popularity of abolition in the future, so like top income-tax rate cuts, there is an appeal even to people who would not benefit immediately. And the differential house prices in the country means abolition would tend to help the South-east, where the majority of Tory voters live.

The second element will be doing something to income tax. In an ideal world, the basic rate would be cut to 20 pence in the pound in two stages - the second stage being the Budget of November 1996. This looks just about possible, but only by not indexing tax allowances fully, so that the real thresholds at which people start to pay income tax rise, or by increasing some other tax. From the point of view of equity, it is much better to raise thresholds rather than cut the basic rate, for the benefit is passed to lower earners. From the point of view of fulfilling a political aim, the attraction of a 20p standard rate has more obvious clout.

What else can the Chancellor do? There is a string of little nips and tucks to the tax system in waiting at the Treasury, and it would be sensible to expect some of these to be trotted out. But they will not have any radical impact either on the economy or the political fortunes of the Government. There is, however, one way of enabling people to feel richer without the country actually being richer, and it is to let the proportion of consumption to GDP rise further.

We are unusual in that we consume an exceptionally high proportion of our output - much higher, as the graph shows, than the US, France, Japan or Germany. The proportion, already the highest of these countries, shot up still further in the 1980s.

There are two ways of looking at this. In one sense, the long-term one, it is unsatisfactory in so far as it means we are under-investing in things that will add to growth in the future.

One has, however, to be aware that investment is only useful if it is wise investment. If it merely means building plants that subsequently have to be junked, or power stations that produce power no one needs, or low-quality public sector housing that has to be pulled down, then the investment is worse than useless. Using lean investment wisely is just as important to future growth prospects as building over-engineered capital projects.

In any case, in the short run, people like to consume. The gap in living standards between the UK and countries such as France and Germany, when measured by numbers of personal computers, foreign holidays taken or miles driven in cars, is not nearly as large as the difference in published GDP per head might suggest. If policy can be swung to encourage a little more consumption, it might make people feel better.

In the long run this is very unsatisfactory. In an ideal world, we would consume at least five percentage points less of GDP, not talk of consuming more. But an unpopular government facing an election is not in an ideal world. So look out for any measures in the Budget - for example in deregulation - designed to encourage us to spend a bit more and save a bit less. I wouldn't put it past them.

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
News
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
PROMOTED VIDEO
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
News
i100(and it's got nothing to do with the Great British Bake Off)
News
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
News
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
News
news It's not just the world that's a mess at the moment...
Sport
footballPremiership preview: All the talking points ahead of this weekend's matches
News
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
people
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
News
i100
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Life and Style
tech
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Scientist (SQL,Data mining, data modelling, PHD, AI)

£50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

SAS Business Analyst - Credit Risk - Retail Banking

£450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

KYC Analyst, Birmingham - £200-£250 p/d

£200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone