Lottery cash gives Clarke tax-cut scope

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Economics Correspondent

Proceeds from the National Lottery will make it easier for Kenneth Clarke, Chancellor of the Exchequer, to cut taxes in his Budget at the end of next month.

The shortfall in the Government's finances would have been about pounds 1bn higher during the past year without revenues from the lottery. Their contribution, improving the published borrowing total, comes at a time of heated debate about whether big tax cuts can be justified given the disappointing state of the public finances.

However, the Chancellor could draw some comfort from the success of yesterday's gilts auction. The pounds 3bn worth of long-term government stocks on offer attracted bids of nearly pounds 6bn. This was better than analysts had expected, and came as a relief to the authorities. Investors' concerns about the scale of public borrowing had led to an unprecedented shortage of bids for the gilts on auction last month.

Public sector borrowing has been so much higher than the Government's projections that the Bank of England might need to hold extra auctions on top of the three already scheduled for the remainder of this financial year. The borrowing needs would have been greater still without lottery revenues.

The delay between payments by Camelot into the lottery distribution fund and disbursements by the fund to good causes has temporarily reduced the public sector borrowing requirement. The timing of the dip could be crucial for this year's discussions about the Budget.

Camelot pays 28 per cent of the lottery revenues to the distribution fund, which are counted as part of central govern- ment revenues. The fund is obliged to disburse - eventually - almost all of this total to good causes through bodies such as the Millenium Fund and Charities Board. This counts as government expenditure.

Since last November lottery proceeds have added nearly pounds 1bn to government revenues, pounds 700m of which has fallen into the current financial year.

About pounds 50m has been paid out so far, and it will take another year before spending starts to catch up with revenues.

Mr Clarke has adjusted the definition of spending that the Government will target to exclude these lottery disbursements. However, there has been no corresponding adjustment to the definition of government revenue.

The lottery figures are included in the ''other'' category in official statistics, along with numerous other miscellaneous categories.

David Mackie, an economist at JP Morgan who identified the lottery effect, said: ''The true fiscal position this year is actually worse than it appears at first blush, due to the technical operation of the National Lottery.'' The Government's woes were worse than most people thought, he said.

Despite the help from lottery revenues the PSBR has been disappointingly high this year. Borrowing has amounted to pounds 20.4bn since April, higher than at the same stage last year. Without the lottery money it would have been about pounds 21.3bn. The Government's summer target for the PSBR for the full year was pounds 23.6bn.