Yet there is also a growing body of opinion in the City that the new Chancellor will not need to put up taxes very much further come November. Indeed, he may not need to put them up at all in overall terms, although he may want to rebalance the plans of his predecessor.
The 'no new taxes' case goes like this. First, revenues are starting to pick up along with the lift in the economy. Last week's public sector borrowing requirement figures were a little disappointing, given that the BT share offer receipts were included, and they leave the deficit at just under pounds 14bn for the first four months of the fiscal year. But the trend of revenues is encouraging: taxes on spending have been climbing with the growth of the economy for some months, and now income tax revenues seem to be growing too. Remember that the fall in the unemployment figures suggests that the downturn in employment evident in the third quarter of last year has been reversed. Any increase in employment will directly increase income tax revenue.
At any rate - according to calculations by Greenwell Montagu - the Treasury's target for an increase in revenues of 3.9 per cent looks achievable, if 'not yet in the bag'.
The second plank of the argument rests on falling interest rates, which naturally cut the cost of financing the public sector deficit. Debt interest as a proportion of gross domestic product had been falling steadily during the 1980s from a peak in 1981/2 of more than 5 per cent. It was down to about 3 per cent in 1991/2, but started to creep up again last year. We do not know what assumption the Treasury made about long-term interest rates in its future financing plans, but it would be surprising if, last autumn, it had expected the gilt market to perform as well as it has. (If they had realised gilt yields would fall by as much as they have, the authorities should not have done so much financing in the early part of the year at less favourable interest rates.) There will certainly be some savings over and above the budgeted amount from lower-than-expected financing costs. There will also be some small saving from a lower-than expected PSBR. This was forecast at pounds 51bn for the current year; it now looks like being about pounds 45bn. While together the savings on debt finance may be only pounds 2bn this financial year, it all helps future planning in that lower long-term interest rates make any level of public debt more acceptable because it is cheaper to fund.
Third, while the main privatisations are now complete, there is probably more scope for leasing Government assets to the private sector than is at present supposed. The end, in effect, of sales of public sector businesses has led people to believe that asset sales can no longer be relied on to contribute to the PSBR. This ignores the fact that the public sector has very substantial assets - particularly property in the shape of office blocks - that it does not need to own, any more than large corporations need to own their headquarters buildings. It is perfectly possible that receipts from the next stage of asset sales could eventually exceed receipts so far.
Three forces are not going to transform public finances. The upward pressure on public spending will continue, partly for demographic reasons, partly because recession has a ratchet effect on spending (because people, faced with tough times, discover benefits to which they are entitled but which they had hitherto failed to claim). But the market is now starting to talk about a significantly lower PSBR for 1994/5: Kleinwort Benson Securities has its estimate down to pounds 33bn, compared with a budget forecast of pounds 44bn and a market consensus of pounds 40bn. It is just beginning to be possible to argue that the cycle-adjusted PSBR is only about 3 per cent of GDP, not the 5 per cent feared by some City commentators.
If that were so, there would be a case for not trying to crank more out of the tax system, but instead to look very closely at all public spending. Politically, the aim should be to sell economies in public spending as 'value for taxpayers' money' not 'yet more cuts'.
In saying that, one leaves the realm of economics and enters that of politics. Still, in the real world of economics, it is the plain fact that while the Government's finances are pretty dreadful, they are not nearly as dreadful as they seemed even three or four months ago.Reuse content