Norman Lamont signalled that, from the financial year 1994/5, the Government would begin a serious assault on the budget deficit, raising taxes by some pounds 17.52bn in the three years from 1993/4. But the bulk of the tightening in fiscal policy has been deferred to the final two financial years of the period. In the year beginning next month, taxes will be raised by a mere pounds 490m.
The programme is intended to curb the PSBR to some pounds 24bn, or about 3.9 per cent of national output, by the financial year 1997/8. This was the budget deficit suggested in the latest medium-term financial strategy. According to the Budget Red Book, the deficit will peak in the coming financial year before broadly halving by 1997/8.
Without action during the next three years, the Chancellor said the PSBR could be some 6 per cent of national output by 1996/7, a level he believed was unacceptable.
In last year's Autumn Statement, Mr Lamont forecast a PSBR of pounds 37bn in 1992/3, rising sharply to pounds 44bn in the coming financial year.
The more pessimistic forecast given yesterday, which amounts to 8 per cent of national output, the highest since 1975/6, came despite clear hopes that a recovery will get under way in the next 12 months. It reflects the fact that some tax, especially corporation tax, is collected a year in arrears.
'Unless action is taken, large deficits will continue over the medium term,' the Chancellor said.
The Treasury also set out a path for the PSBR under the assumptions of high or low growth in the next four financial years to 1997/8. Under the high-growth scenario, when the expansion rises to about 3.5 per cent a year, the PSBR falls to about 2.25 per cent of GDP without raising taxes.
But under the assumption of low growth of a maximum 2.5 per cent during the period, the deficit could still be 5.25 per cent of GDP by the end of the period.
The Red Book says: 'Even if economic developments are less favourable, the wedge of tax increases announced in the Budget should ensure a substantial reduction in the PSBR over the medium term.'
The document also shows that the main reason for the sharp rise in the deficit in 1993/4 is a further rise in public spending, due to recession and growing interest payments on expanding government debt.
Total public spending will soar to pounds 283.4bn in 1993/4 from an estimated pounds 269.1bn. Receipts, however, will also rise to pounds 232.2bn from pounds 223.1bn, broadly in line with the growth of money GDP. Within receipts, a projected 2 per cent rise in income tax receipts is offset by a 7 per cent plunge in corporation taxes. But relatively buoyant consumer spending will push up Customs and Excise receipts - excise duties and VAT - by some 6.5 per cent.
The recession means that taxes and social security contributions will edge down slightly as a percentage of national output in 1993/4, from an estimated 34.5 to 34.25 per cent of national output.
General government expenditure, excluding privatisation proceeds, will peak at 45.5 per cent of national output next year before falling gently towards 43 per cent by 1997/8, according to the Red Book.
In contrast to the Organisation for Economic Cooperation and Development, the Chancellor insisted that the Budget deficit was largely due to recession. Britain's relatively low ratio of public debt to national output, halved following three years of budget surpluses in the late 1980s, meant that spending could balloon and revenues shrink with recession. But the scale of the problem now faced is demonstrated by the Red Book projection that net public debt is expected to rise from about 30 per cent of GDP today towards 50 per cent by 1997/8.
But as the debt mounted, what was chiefly a deficit caused by the trough of the economic cycle could become entrenched and would not come down as recovery set in, the Chancellor suggested.
Mounting interest payments on a growing burden of government debt meant that 'what might have started off as a cyclical deficit will soon become a structural deficit unless action is taken to bring borrowing down,' he added.
(Graphs omitted)Reuse content