PSBR deals blow to Budget tax cut hopes
Friday 21 April 1995
A survey by the economic analysts IDEA found a third of City traders do not believe tax cuts of any size would win the election for the Conservatives. Almost all thought cuts worth £5bn - equivalent to just over 2p off the basic rate of income tax - would trigger a base rate increase.
Chris Furness, senior analyst at IDEA, said: "The Government's natural constituency in the City does not think the electorate can be bought."
Electoral considerations aside, economists do not believe a big reduction in the tax burden would be wise. It would re-heat the economy when most economists reckon slower growth is needed to prevent inflation rising.
Keith Skeoch, chief economist at James Capel, said: "There is no scope for tax cuts at all. The economy does not need a shot in the arm." If the Chancellor wanted to use lower taxes to boost consumer spending, higher interest rates would be needed to dampen the resulting inflationary pressure.
Reductions in tax would also threaten to derail the Government's progress in bringing the public sector borrowing requirement below the level of 3 per cent of gross domestic product demanded by both common sense and the Maastricht treaty. Helen Macfarlane at Hoare Govett said: "It would be exactly the wrong time to cut taxes after the struggle to get fiscal policy on the right track."
The PSBR for the 1994/95 fiscal year turned out at £35.6bn, £1.3bn above the Treasury's Budget forecast. In March alone it was £10.4bn, some £3bn higher than City expectations. Although the overshoot was small compared to the usual error in predicting the PSBR, until last month many observers were confident it would turn out lower than the Treasury had forecast.
Government spending was lower than the Treasury had planned, but revenues fell even further short. Part of the explanation was the strength of exports, which cut into Customs and Excise receipts due to VAT refunds.
However, income and corporation tax revenues were below forecast too, by £0.9bn. Slower economic growth accounts for this shortfall.
The figures came as a new survey of more than 8,000 companies by the British Chambers of Commerce showed a significant slowdown in both domestic and export orders. Export orders are still strong but have fallen from recent record levels. There was a sharp fall in the balance of firms reporting rising domestic orders.
Robin Geldard, BCC president, said: "Fears of an overheating economy were certainly premature. The brakes have been put on via tax and interest rate rises." He said declining demand and cash-flow problems would add up to "a lethal cocktail" for many firms.
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