Comment: Lamont boxes cleverly on taxes

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The Independent Online
This is a clever budget. It is also a pointer to the general pressure on public finances, not just here in Britain but throughout the industrial world. It is a pressure that will inevitably increase for demographic reasons, because governments everywhere will be strapped for cash.

The cleverness first. If anyone had said four years ago that the Chancellor in 1993 would be planning for a borrowing requirement of pounds 50bn, they would have been laughed at. Then the budget was in surplus and people were wondering whether the national debt (which had been halved in less than 10 years) might disappear altogether. Now Mr Lamont was able to get away with a forecast that means the government borrowing nearly pounds 1,000 for every man, woman and child in the country. He was able to get away with it by announcing tax increases in the years to come, and in particular rises that were either helpful (in that they are environmentally kind or they narrowed loopholes), or at least did as little damage as possible to the real economy.

But this does not mean the problem has gone away. The central forecast for the borrowing requirement in 1997/8 is 3.75 per cent of GDP, well above the Maastricht guideline; even the best forecast, which assumes growth of 3 per cent, leaves a PSBR at 2.25 per cent of GDP. But the dreadful figure of pounds 50bn has been disclosed without the markets going berserk. That is progress.

INCREASING REVENUES

The figure was deemed acceptable because the strategy was deemed acceptable. As has been argued in, amongst other places, this newspaper, the aim this year should be to put in place measures that will increase revenues in the future without doing anything that might threaten the recovery now. The recovery is probably more secure than the Chancellor yesterday admitted, but the Treasury has held back on its forecast for two reasons: it has been very wrong before and does not want to tempt fate again; and the Continental European economy is heading down so fast that it could hold back UK growth - some 60 per cent of our exports go to other EC countries. It is small comfort that Germany, Italy, Spain and France will grow more slowly than Britain. Recession in our export markets will drag our recovery down to the Treasury forecast of 1.25 per cent growth this year. With a following wind we might have achieved nearly double that.

Given the lack of evidence about the solidity of recovery it was acceptable not to increase the tax burden now. The markets have to finance the deficit, and markets look forward. Provided they can see revenue-raising measures in law this year, they will worry less about waiting for the money to come in. That pounds 50bn figure is the genuine central forecast, so they should not need to worry about any massaging, but if the hunch within the Treasury is right and growth is rather better, the figure could be on the high side.

There will be criticism from some quarters along the lines that had the Chancellor tightened fiscal policy now, he could have engineered a cut in base rates. The case against that is that a cut to 5 per cent would have virtually no impact on consumer demand, for it would not feed through into mortgages or credit. Indeed it could even have perverse results if people thought that they had seen the bottom of the interest-rate cycle and therefore should expect the next move in rates to be up. There may be another cut in base rates later this year: it could come through very quickly if sterling shot up too fast. But further interest-rate cuts are not now a priority.

If the Budget is clever, it is also forward-looking - and not just by legislating for tax increases in the future. It points the way for taxation policy in all industrial countries for the rest of this century and beyond: more stress on taxes on spending rather than on income; new or increased taxes and user charges; worries about funding social security.

Looked at in the big picture, perhaps the most interesting thing in this budget is the parallels with measures being taken by other countries. We are doing something about the deficit: so too are the US, Germany, Sweden (which has really dreadful problems), and many others. We are increasing taxation on energy: so too is the US (though by a tiny amount). We are having to increase National Insurance contributions to cover a deficit in the fund: our deficit is far more manageable than that of France.

AGEING POPULATIONS

There is a really big issue here that has yet to reach full public awareness: the ageing of the population of all industrial countries means that a smaller and smaller working population is going to have to support a larger and larger proportion of the elderly. They will have to support them by paying higher taxes. So governments of all industrial countries are going to be desperately scratching around for new sources of revenue, for borrowing actually makes matters worse. By rights governments ought to be building up large surpluses, which could be run down as the population ages - the public-sector deficits around the world are happening at absolutely the wrong time.

So this sort of budget, which dresses up an increase in the tax burden in the best political light, is going to become much more common around the world. But increasing taxation has to be done in such a way as not to undermine competitiveness, not so much vis-a-vis other EC countries or even the US and Japan, but rather against the newly industrialised countries of the Far East, and eventually the new economies of Eastern Europe.

Mr Lamont yesterday framed his budget partly in terms of what would wash with the British electorate: what tax increases he could get away with politically. And he framed it partly in terms of what the financial markets would accept: they would fund the borrowing requirement provided they saw new revenue coming in the future. But, as he acknowledged, he also had to keep in mind UK competitiveness internationally: what taxation changes could be made that would not damage British industry in world terms.

In the next couple of years, things are going to look better for Britain. For purely cyclical reasons, the Anglo-Saxon economies will grow faster than the Continental and the Japanese. As the recession rolls on, it will not just be the US and Britain that have a struggle balancing their budgets. This is a world problem, and not one that will easily be solved.

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