Lower PSBR renews pressure on Chancellor to reduce taxes

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The Independent Online
THE CHANCELLOR Kenneth Clarke yesterday came under pressure to cut taxes in November's Budget after Treasury figures showed the Government borrowed much less last month to meet the shortfall between spending and revenue than the City had expected.

The Government borrowed pounds 1.1bn in July, compared with City forecasts of a pounds 1.6bn deficit. Government borrowing is falling because economic recovery is boosting tax revenues and cutting the amount spent on benefits.

'These figures show there could be some easing of the tax burden in November's Budget,' said David Shaw MP, of the Tory backbench finance committee.

The Government has borrowed a total of pounds 12.5bn in the first four months of the financial year, down from pounds 14.8bn in the same period last year. The Treasury forecast in June that the Government would need to borrow pounds 36.1bn during the year, but most economists believe the figure be at least pounds 2bn lower.

Tax revenues have been boosted by high receipts from VAT, rapid growth in high street spending and tax on domestic fuel.

Michael Saunders, economist at Salomon Brothers, said spending by government departments could come in pounds 1bn- pounds 2bn lower than the Treasury forecasts, with the defence and health departments already under expectations.

Adrian Cooper, a former Treasury economist now at the brokers James Capel, said that it would be dangerous to cut taxes without offsetting cuts in public spending.

'In these circumstances, tax cuts not matched by spending cuts would only fuel already robust demand growth, provoking the Bank of England to push for an offsetting rise in interest rates.'

The fall in government borrowing divided the Conservative party over how any tax cuts should be applied. Sir George Young, Financial Secretary to the Treasury, reaffirmed the Government's objective of reducing the basic rate of income tax to 20p.

But senior Tory party figures are urging the Prime Minister to insist on cuts in income tax being directed at the basic rate of 25p in the pound, on the ground that it helps more of the middle class, 'natural' Tory supporters.

Fresh evidence of the strength of recovery emerged yesterday as the Credit Card Research Group reported that, at pounds 14.53bn, spending on debit and credit cards was 16 per cent higher in the three months to July than the same period a year earlier. But figures from the Department of the Environment showed a sharp drop in the number of construction orders in June.

A further fall in unemployment is expected to be announced today, as are the latest inflation figures.

(Graph omitted)