This black hole came in various shapes and sizes. To some, it referred to the relatively trivial matter of the loss of privatisation receipts of about pounds 1.5bn a year if Labour won. To others, it represented the more significant matter of the Government's "structural" budget deficit, which concerned serious commentators such as Andrew Dilnot at the Institute for Fiscal Studies.
Practically no-one, to my recollection, suggested that the PSBR might not prove to be a problem at all, and indeed that with a few corrective measures from the new Chancellor, it might disappear altogether within a couple of years. Yet disappear it might, with a fair wind, by the end of the next fiscal year.
Of course, the disappearance of the PSBR would not necessarily imply that the fiscal position in this country is satisfactory. After all, the budget surplus earned for a short period under Chancellor Lawson occurred when the budgetary stance was too loose. The same could happen again, and it is certainly important not to get too mesmerised by impressive- looking PSBR data at the peak of an economic cycle. But those who are thumping the table about the need for large consumer tax rises have got the problem out of scale. We are not facing a rerun of 1993, when the PSBR approached pounds 50bn, and it is about time this was acknowledged.
David Walton of Goldman Sachs has recently published a study showing how the PSBR target of pounds 19bn in 1997/98, which was bequeathed by Ken Clarke to Gordon Brown, could actually turn into an outcome of less than pounds 12bn.
First, the pounds 3.6bn undershoot of the PSBR from last year, which was primarily caused by a bounce-back in tax receipts relative to forecast, will probably get carried through into this year's numbers. Second, the tumbling unemployment figures will knock around pounds 0.5bn off social security spending. Third, the impact of the windfall tax on the privatised utilities will probably be to reduce the PSBR this year by at least pounds 2bn.
(The total windfall levy of say pounds 5bn will probably be taken in two equal instalments, so pounds 2.5bn will come in this year, while only about pounds 0.5bn is likely to disbursed in special job measures.) Add in a very modest consumer tax increase of say pounds 1-2bn, probably involving a much more significant reshuffling of the tax system netting out to this amount, and the Chancellor could quite easily announce a post-Budget PSBR target of pounds 11-12bn.
Then there is the even better outlook for next year. Assuming, as seems virtually certain in this summer's Budget at least, that Mr Brown sticks to his predecessor's public spending targets, it is already cast in stone that revenue will grow much more strongly than spending in 1998/99.
Assume that revenue grows in real terms by about 3 per cent, a little faster than GDP, and that spending grows by the planned 1 per cent. This alone knocks a further pounds 7bn off the PSBR next year. But even that is not all. Recent data shows that receipts from corporation tax are rising much more strongly than anticipated, and profits growth suggests that this might well continue next year, notwithstanding the worrying rise in the sterling exchange rate.
Furthermore, there is one tax change which Mr Brown might announce in the summer 1997 Budget which will not impact revenue until next year.
This concerns the arcane but important matter of reducing the rate of advance corporation tax from the present 20p to (say) 10p or even zero. Although this sounds like a tax cut, it in effect does two things.
First, it permanently increases the tax paid on company dividends by tax-free institutions such as pension funds. A cut in ACT from 20p to 10p actually doubles the effective tax rate paid by pension funds on dividend receipts, and this raises about pounds 3.5bn in a full year.
Second, however, the cut in the ACT rate temporarily reduces the amount of corporation tax paid in the first year, though this effect is entirely neutralised in future years.
If the Chancellor halved the rate of ACT from July 1997 onwards, it would have virtually no effect on receipts in the current financial year, but would raise the full pounds 3.5bn from next year onwards. (In the very long term, part of this revenue gain would probably be eroded as companies top up their payments into pension funds, and claim these payments against their mainstream corporation tax liabilities, but the IFS says that these offsets are not likely to be very large for several years.)
We can therefore now see how a balanced budget in 1998/99 could possibly be achieved. Remember that the target for the current year could be as low as pounds 11-12bn. This could be reduced by about pounds 7bn next year as a result of the public spending straitjacket, and by a further pounds 3.5bn as a result of a halving in ACT.
Add in a little extra revenue from the natural buoyancy of corporation tax and the PSBR has disappeared altogether. And this would have been achieved with only a very moderate frontal assault on the personal sector, amounting to perhaps pounds 1-2bn this year.
This could readily be accomplished by politically feasible tax changes, including an increase in petrol duties and the gradual phasing out of mortgage tax relief.
In view of all the pessimism that has been around on the state of the public accounts, this seems almost too good to be true. So where are the flies in the ointment?
There are several. First, there would be some net increase in personal taxation, which may prove politically difficult, even though none of Labour's explicit election pledges would be breached. The ACT change may look like a painless tax, but it would reduce expected returns on pension investments and hit the stock market, and the pension industry would make every effort to make this very visible to the electorate.
Second, there would still be the problem of actually living with the very restrictive public spending totals set by Mr Clarke. This may prove politically infeasible in 1998.
Third, there would probably still be some economists who would continue to claim that the public accounts were in a mess, since a balanced budget at the top of a boom would not be deemed good enough for them.
Fourth, very little would have been done to slow the growth of consumer spending, since neither the windfall tax revenue, nor the ACT change, should be counted as contractionary in terms of their impact on demand. More work would undoubtedly be needed on the interest rate front.
Of these problems, by far the most significant is the absence of any significant planned growth in real public services in the next two years. If the budget cannot be balanced next year, it will be because these targets eventually have to be relaxed.Reuse content