Clarke's scope for tax cuts 'all but gone'

A surprise surge in Government spending last month got the public finances off to a disappointing start in the new financial year. The Chancellor could miss this year's target for government borrowing by up to pounds 8bn, analysts said yesterday.

''Based on economic considerations alone, Mr Clarke's scope for tax cuts has all but disappeared,'' said Alex Garrard of investment bank UBS.

The public sector borrowing requirement was pounds 3.3bn last month, pounds 435m lower than in April 1995. The Treasury said it was too early in the financial year to draw any conclusions. But for the Chancellor to meet his pounds 22.4bn target for the 1996/97 year, the monthly borrowing requirement needs to be pounds 800m a month lower than last year on average.

''The risks of overshooting are now on the spending side,'' said Adam Cole, an economist at James Capel.

Many City economists are sceptical that Mr Clarke will be able to stick to his tough spending target given the tendency of expenditure to climb sharply in the run-up to a general election. Although spending at a faster rate does not guarantee winning an election, cutting its growth seems to guarantee losing one.

The last time growth in government spending fell sharply in the years before a general election was in 1973 and 1974, before Edward Heath's government lost office. Although a recovery in spending did not help Labour hang on to power in 1979, each subsequent election has been preceded by faster expenditure growth, as the chart above shows.

Departmental outlays last month were 7.5 per cent higher than a year earlier. The Treasury has forecast that they will grow by only 1.2 per cent during the year as a whole, even though public sector pay awards are running at 2 to 3 per cent.

''Pay deals alone will take up all of the planned increase in public expenditure this year,'' said Kevin Darlington at Hoare Govett.

The Government is likely to revise up its borrowing target when the Treasury publishes its mid-year forecast in July, according to Mr Darlington. ''The Chancellor will not want any embarrassing over-runs as the Budget approaches. The question is how realistic he will make his spending plans for future years.''

Analysts fully expect Mr Clarke to announce tax cuts worth between pounds 3bn and pounds 5bn in November despite his protestations that he will not cut them if he cannot afford it. Up to half of that amount can be found by reducing the contingency reserve - the emergency over-spending fund - for 1997/98.

The rest is likely to be financed by pencilling in further planned expenditure cuts, even though most City commentators think the existing plans are extremely ambitious. The next public spending round will get into full swing early in the summer.

City forecasts for this year's PSBR - notoriously difficult to predict accurately - range from pounds 23bn to pounds 32bn. They have been revised steadily upwards during recent months to take account of slow growth in government revenues, especially VAT, and of special factors such as BSE compensation, which some say could exceed pounds 1bn.

The pace of growth in tax revenues picked up in April, despite the fact that tax cuts came into effect. The year-on-year increase in total receipts jumped from below 4 per cent to above 12 per cent. One of the culprits for last year's tax shortfall, VAT receipts, rose 11.5 per cent. The other, corporation tax receipts, grew by a more modest 3.8 per cent.

Comment, page 19