Comment: Chancellor bets all on electoral jam tomorrow
Thursday 30 November 1995
Certainly the electoral logic of this Budget makes it look like the first of two. An irresistible precedent is Nigel Lawson's 1p off the 30p basic rate of tax in 1986, followed by 2p off in the pre-election Budget of 1987 and the bait to the electorate of a 25p rate. The hope on the backbenches is that Mr Clarke will preside over a similar 2p cut next year, with the promise of a 20p rate after the election being dangled in front of the electorate .
There was, however, one big difference in the tax cuts Mr Lawson presided over: the budget deficit was running in single figures. In 1988, the Chancellor was able to deliver the pledge of a 25p basic rate of tax and balance the budget - indeed it had swung into surplus. By contrast, Kenneth Clarke's ambition of balancing the budget has now been postponed to the final year of the decade, the occasion for a pre-millennium knees-up at the Treasury.
Even so, the Chancellor's hand would be greatly strengthened if he could announce a more favourable outcome to the PSBR next year thanks to better than expected tax revenues. According to the Institute for Fiscal Studies, that is a distinct possibility. They say the Treasury is too pessimistic, to the tune of pounds 4bn. On the basis of the Treasury's forecast for growth in nominal and real GDP, the institute's model projects a PSBR next year of pounds 18.5bn.
Fast forward to the House next November. Mr Clarke, glass of cut-price whisky in hand, galvanises the backbenches with the news that the PSBR has come in at about pounds 18bn. That makes Britain one of the few countries already eligible for entry into EMU. What's more, he will say, the budget deficit continues on a downward path to pounds 12bn, the sum projected by the Institute for Fiscal Studies for 1997-98 on the basis of its less pessimistic view of the prospects for tax revenue. One more squeeze on public spending, another push on the private finance initiative, and that journey towards a balanced budget remains on course - together with a further 2p off the basic rate.
Now spin the tape back and consider a more gloomy but equally plausible prospect. The Treasury's forecast for tax revenue could well err on the side of caution. But its projection for expenditure almost certainly errs on the side of optimism. The control total is set to fall in real terms by 1 per cent next year. But then it was forecast to do precisely that in 1994-95. Instead it grew by as much. Again, in the current year, the control total was set to fall at the time of the last Budget by about 1 per cent. Now the Treasury admits it will grow by almost half a per cent.
If you look at total spending excluding privatisation proceeds, the position is markedly worse. Debt interest this year is up by a cool billion pounds on the figure previously forecast by the Treasury. On this measure, public spending will grow by 1 per cent in real terms this year.
Likely expenditure overruns are one way in which the Treasury's alleged hoard of tax cuts could vanish into thin air. The other is if its growth forecast of 3 per cent turns out to be over-optimistic, as several City analysts suspect.
The electoral logic may point to a rip-roaring Budget a year hence. The structural deficit of Britain's public finances points in a more sober direction. In this, as in so many other aspects of the economy, the 1980s do not provide helpful portents for the 1990s.
Putting a new gloss on an old story
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