Borrowing: Shortfall in government revenues takes the shine off prospects for cutting taxes

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The Independent Online
''One thing I'm good at is controlling public spending,'' Kenneth Clarke boasted yesterday, writes Diane Coyle.

The Treasury's new forecasts for public sector borrowing assume, in line with their usual convention, that planned spending in the next few years will be the same as the control total set out in the Budget. Officially, there are no tax cuts factored into the predictions either. The reason the forecast for the borrowing requirement has been raised by pounds 2bn this year and pounds 3bn next is because tax revenues have not grown as much as expected.

Some economists outside the Treasury concluded that the official borrowing forecast still left room for some reduction in taxes. Kevin Darlington, an economist at Hoare Govett, said: "There is scope for a lot of horse- trading over public spending plans."

Others thought a PSBR of pounds 23.5bn this year and pounds 16bn next year were believable only as long as there were no tax cuts. Steven Bell, chief economist at Morgan Grenfell, thought financial markets would swallow another upward revision to pay for modest tax cuts. "But the Government would not get away with naked bribery,'' he said.

The level of government spending expected in the current financial year is virtually unchanged at pounds 301.9bn, and shaded down to pounds 310.9bn for 1996- 97. Last week, the Cabinet agreed to hold spending within the previously agreed totals.

The shine has been taken off this success by slower revenue growth. Income tax revenues were pounds 1.2bn less than expected in 1994-95, VAT pounds 1.5bn less and corporation tax receipts pounds 0.8bn less. The shortfall has puzzled officials, given the strength of the recovery last year. They have reduced this year's forecast for revenues by pounds 2.5bn.

Mr Clarke yesterday promised tax cuts but insisted they would be made only when prudent and affordable. He sidestepped questions about when this might be. "It isn't sensible policy to set an absolute figure which will trigger tax cuts." In a line reminiscent of the shadow Chancellor, Gordon Brown, he added that it would depend on the state of the economy.