Comment: A happier new year to the Treasury

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Viewed from the Treasury, next year has to be better, for 1992 must have been the worst year for that institution since the mid-1970s. What has made 1992 so awful is that everything went wrong at the same time. It got its forecasts for the economy spectacularly wrong; the recession, while not as deep as that of 1980-81, has been longer; and it suffered the humiliation of sterling's unplanned exit from the European exchange rate mechanism.

Such disasters have happened before, but not since the mid-1970s, when in addition the Treasury lost control of public spending, have so many things gone wrong at the same time. And then, of course, there was that Access card business . . .

So what will happen next year? Will 1993 be akin to 1981, the year when Geoffrey Howe's tough Budget set public policy on course for the sustained recovery of the middle 1980s? Or will it be more like 1977 or 1978, the years after Britain had gone to the International Monetary Fund for a loan to rescue sterling, which led to the 'winter of discontent' and the 1979 Conservative government?

It is not easy to distill the different views in the Treasury into a single story, but it is possible to catch a feel for its hopes and fears, including those of the Chancellor. These would run something like this:

The starting point has to be the British economic recovery. No one is prepared to admit to being confident about next year, if only because the Treasury has been so wrong in the past. It has identified two previous recoveries, both of which were aborted: one in the autumn of last year, the other in the spring of this. In each case confidence started to climb, only to flop back. Now, post-Black Wednesday, with the devaluation of sterling and the cuts in interest rates, the hope has to be that the recovery now stirring will be sustained next year.


But how speedy the recovery will turn out to be is very unclear. A best guess would have the economy growing at around 2.5 per cent by the second half of next year, which might enable growth for the year as a whole to be up by a little more than the 1 per cent officially forecast. If this is right, the rise in unemployment ought to tail off in the second half of next year - a relief to everyone.

The biggest worry as far as unemployment is concerned is the way in which a new wave of job cuts, particularly in manufacturing industry, struck around September this year. Commentators tend not to look at the number of people in employment, preferring to focus on those out of it, but the fall in numbers employed is quite ominous. It is still possible that the peak in the number of unemployed will be lower this cycle than it was in the middle 1980s, but the Treasury will not count on a levelling-off of the rise in joblessness until it sees it.

Still, some growth is better than no growth, and looking at the dire prospects for the Continental economies, in particular Germany's, Britain in relative terms might look a modest success story.

When the Treasury is not worrying about the economy it is worrying about public finances. Something will have to happen to cut the Government's borrowing requirement, and it will have to start happening in the coming Budget in March. The financial markets were aghast when the Chancellor revealed that the borrowing requirement might rise to some 7 per cent of GDP next year.

It now looks increasingly as though that will not be allowed to happen. Ministers have been dropping quiet hints that the tax burden will have to rise over the next two or three years, and it would be astounding if the first stage of this rise is not announced in the Budget.

The Budget planning process does not get under way until the meeting between Treasury ministers and senior officials at Chevening in January, but the framework for the decisions is easy to see. The Chancellor has to chart a credible path towards, if not a balanced budget, a borrowing requirement of less than 1 per cent of GDP. There is a debate going on as to the proportion of the present deficit that is the result of the recession and the proportion that is 'structural', the deficit that would remain even were the economy growing at its full capacity. The sort of figure talked about for this structural deficit is 1.5 per cent of GDP. This may or may not be right, and no one will know until the economy does get back to capacity, whatever that is. But the practical point is that while there are risks in increasing taxes while the economy is still convalescent, there are also risks in waiting.


Something may be done on the spending side, but the new arrangements for controlling public spending have set out quite tight limits. The coming year is not so restrictive, but the planned totals for the next two are. Besides, people want public spending protected; that being so, they will have to pay more in tax. So expect the March Budget to increase the tax burden. It would be surprising if the Chancellor increased income tax rates, and given the Treasury's concern about employment, it may well not increase National Insurance, so the main way forward will presumably be through an increase in indirect taxes. These increases will, however, be phased in over a number of years.

The other issue that will become clearer during the course of next year is the relationship between the Treasury and the Bank of England. Giving the Bank independence in any formal way is not on the Government's political agenda. Instead the aim is to allow it gradually to gain influence.

The new Governor will be in place in the middle of the year. By then the new procedures for determining monetary policy, in particular the Bank's duty to report quarterly on inflation performance, will have been running for six months.

Potentially this report, when coupled with the Government's inflation target, is a powerful weapon if the Bank is astute enough to make it so. The Chancellor would see this as a new and necessary discipline on himself. No one is saying so in so many words, but it is not difficult to see circumstances where the Bank used the report on inflation to force the Chancellor to take action on interest rates. The financial markets would see to that.

Taken in the round, 1993 looks like being a year of important change. It will be a year when those alleged green shoots of recovery really have to sprout, though no one is expecting particularly vigorous growth. It will be a year when the tax policies of the next four years will be set out, and which will have to include some rise in the tax burden. And it will be a year when a new relationship will be developed between the Treasury and the Bank. Change, of course, is not at all the same as success. But at least it cannot be worse than the year coming to a close.