Stripping off Clarke's bikini
Thursday 07 December 1995
Despite the big increase in the forecast for public borrowing next year, the Chancellor succeeded in portraying his Budget as cautious by claiming he had found the money for his pounds 3bn tax giveaway by matching spending cuts. On both counts Mr Clarke is open to challenge.
Labour's jibe of 7p up, 1p down was too charitable. Compared with the position this year, Mr Clarke hardly cut taxes at all. For one thing, the rise in road fuel and tobacco duties will bring in an extra pounds 1.3bn. This is not altered by the fact that they were pre-announced, in the form of an intention to raise them in real terms by 5 and 3 per cent a year respectively in the 1993 Budget.
Then there is the increase in the council tax which is implied by the Government's own projections. Tony Travers, an expert in local government at the LSE, expects rises of 8-9 per cent. This is what the Treasury itself seems to be projecting, with council tax revenues set to rise by pounds 700m to pounds 9.9bn next year.
Taking these two sources of revenue into account, Mr Clarke's giveaway of pounds 3bn is reduced to a billion. But it isn't only his claim to have cut taxes that does not stand up to scrutiny. For the Chancellor didn't hold the line on expenditure to anything like the extent he suggested.
On the surface, the clampdown on spending looks as impressive as the rhetoric. Against a background in which real public spending has risen at an annual rate of almost 2 per cent in the past 15 years, the Treasury's objective for the next financial year certainly appears tough. The control total - which excludes debt interest and cyclically varying social security payments - is set to fall by almost 1 per cent.
But delve more deeply into the details and doubts creep in. Included in the control total of pounds 260bn next year is a cut in the housing budget of about half a billion pounds, which comes from the first tranche in the sell-off in the Housing Corporation's loan portfolio. The Department of Transport's budget also gains by about a billion pounds from the sale of the rolling stock companies, after a boost of pounds 800m this year.
These are privatisations that dare not speak their names, and in common with most other privatisation proceeds, should be treated as extra revenue rather than as spending offsets.
The much-vaunted successor to privatisation is the Private Finance Initiative, under which public works are privately financed. Spending under the PFI will jump from pounds 600m this year to pounds l.9bn next year.
The cost to the taxpayer is postponed until the services derived from PFI contracts become available, but the bill will eventually be presented.
Then there is the lottery to consider. So far the effect of the Government's sparkling new stream of revenue - this time a tax that dares not speak its name - has been simply to flatter the PSBR. Next year, however, the distribution fund begins to shell out money in earnest. Lottery-financed expenditure is poised to rise from pounds 300m this year to pounds 1.4bn in 1996/7.
Last June, the Chancellor redefined the Government's overall expenditure target to exclude spending financed by the lottery. But the Treasury does take account of it in its presentation of public capital spending, which in its absence would fall in real terms by 13 per cent next year rather than the 8 per cent decline shown in the Red Book. As we saw in the clash between William Waldegrave and Virginia Bottomley before the Budget, the Chief Secretary, for one, sees the availability of lottery finance as a reason for cutting departmental spending.
What happens when we include these elements in the public spending totals? The control total, when adjusted to take account of the privatisation proceeds from the housing corporation loan book and the rolling stock companies, together with planned PFI spending, is flat in real terms rather than the 1 per cent official decline. When adjusted similarly, overall expenditure, which also includes lottery-financed spending, rises by almost half a per cent rather than falling by the same amount.
Remember, this is the plan. In the past two years, an inflation under- run has turned planned austerity into a more lenient regime by allowing planned cash totals to purchase more in the way of goods and services. There is a good chance that this could occur again in 1996/7.
More important, the curbs on public spending bear the hallmarks of a temporary rather than a permanent change. There is a pay policy - again one that dares not speak its name - in the form of a freeze on the public sector pay bill. All pay policies have eventually collapsed, and it is unclear why this one should defy that rule. There are further attempts to root out waste, and crude measures such as the imposition of the 12 per cent real cut in running costs over the next three years.
So did Mr Clarke have his Budget in mind when he raised the subject of bikinis? As he said, when teasing the party faithful about tax cuts: you might say that, I couldn't possibly comment.
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