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Treasury to get nuclear fillip

Nuclear privatisation is likely to make it easier for the Government to find money for tax cuts next year, contrary to official suggestions that the £3bn proceeds will be needed just to clean up the elderly Magnox reactors that will stay in state hands.

The decision to keep the Magnox reactors leaves the Government with an enormous bill for fuel reprocessing, waste treatment and decommissioning over the next 100 years.

Figures published by the Department of Trade and Industry this week indicated a £2.6bn shortfall in funds available to pay these costs, estimated by the nuclear generators at £9.8bn and by the Government at £8.5bn.

Officials said almost all the cash from the flotation of the rest of the nuclear industry next year would go to make up the shortfall. The DTI said there was thus no question of using the sale to fund tax cuts.

However, Treasury officials confirmed yesterday that government outlays normally count towards public spending in the years incurred. If the Treasury sticks to this principle, the actual burden on state finances over the next few years could be much less than £8.5bn, because the bulk of the costs would not have to be met for many years.

In the near future, there will be two main cash impacts on public finances from the nuclear decisions announced this week. Cancellation of the nuclear levy - a tax on electricity consumers - in July next year, 18 months earlier than expected, will reduce government revenue forecasts for 1996-97 and 1997-98 by as much as £2bn.

This could be more than offset by the cash income from the privatisation next year, which the Government hopes will raise £3bn-£3.5bn. Extra net revenue the Government could use for tax cuts could be as much as £1bn- £1.5bn.

The Government will also gain £2bn of cash held by the nuclear generators at the time of privatisation. But this will make no difference to public finances, since the money is held on deposit with the National Loans Fund and already counts towards the PSBR.

The DTI this week published figures showing how the Government proposes to find the Magnox clean-up money. But the figures take no account of the timing of payments and cast little light on the effect of the privatisation on the PSBR or Treasury finances.

The chart reworks the DTI figures to show how officials have found an unexpected £2.2bn to reduce the overall cost of the clean-up programme, from the £9.8bn shown in the 1995 accounts of Nuclear Electric and Scottish Nuclear.

The Government has saved £1.3bn at a stroke by raising the interest rate at which future payments are discounted to present values, from the conservative 2 per cent a year adopted by the nuclear companies to 3.5 per cent. This change applies for the first 25 years. It has found another £900m by knocking 10 per cent off the companies' estimates of future clean-up costs.

The next £5bn comes in four lumps, all expected. Most of the final £2.6bn would on previous plans have come from keeping the nuclear levy until 1998. But the DTI now prefers to drop the levy so it can cut electricity prices. It says the hole will be filled by privatisation proceeds.