Tax rises in Budget 'will slow pace of recovery': Warning from Treasury minister set to dampen renewed consumer confidence

A WARNING that recovery in the new year will be slowed by the tax increases in the Budget was given yesterday by Stephen Dorrell, the Financial Secretary to the Treasury.

As shops reported booming trade from the post-Christmas sales, Mr Dorrell's remarks risked damping consumer optimism. However, he insisted the Budget would enable the recovery to be sustained.

'You are right to say the tax increases coming in will slow the recovery from the pace it would otherwise have taken. It is because that action has been taken that I am confident it would be sustained,' Mr Dorrell said on BBC Radio.

'What we do not want is a consumer recovery which gets out of control, which leads to inflationary boom and balance of payments difficulties of the kind we have seen in the past. We have taken the steps necessary to contain the rate of improvement in the economy.'

His remarks underline the message from ministers that the two 1993 Budgets will have to be paid for in 1994 with tax increases totalling about pounds 15-17bn. Kenneth Clarke, the Chancellor, conceded before Christmas that that was the equivalent of 7p in the pound on the standard rate of income tax.

Labour intends to go on the offensive in the new year by attacking the Tories for increasing the tax burden. Andrew Smith, a Labour Treasury spokesman, said: 'When, come April, people have their pay slip in one hand and a fuel bill in the other they will see for themselves just how hard the Government is hitting them on taxation.'

Recovery prospects were also hit by a report indicating that wage deals were edging downwards to some of the lowest levels since the Second World War. This comes at a time when the Retail Price Index is expected to move up significantly.

While news that pay rises are continuing to slide will help the fight against inflation, low wages will undermine high street spending and feed through to factories already coping with recession.

The research group, Incomes Data Services, says two-thirds of wage deals from October to December were between 1 and 2.9 per cent, compared with 2 to 3.9 per cent in the quarter to September.

The December issue of IDS Report points out that within the overall public sector pay bill freeze also announced in the Budget, ministers will be aiming for settlements of around the 2 per cent mark, funded by 'efficiency savings'. It says the budget 'Red Book' referred to such savings but was not clear whether the figure was a 'maximum, a planning measure or a target'.

Inevitably the stringent policy which provides for a pay bill freeze until March 1997 will lead to thousands of redundancies among employees whose pay is funded by the state, and thus a further reduction in consumer expenditure.

The IDS researchers point out that most City economists now expect inflation to rise significantly in the first half of 1994. This is because of an increase in excise duties on petrol and tobacco on 1 December and the imposition of VAT on domestic fuel from April.

Previous mortgage rate cuts will also drop out of the year-on-year figures and mortgage interest relief will be reduced from April. Inflation is expected to be between 1.7 and 2 per cent in the last quarter of 1993, but is predicted to rise to between 2.4 and 4.2 per cent in the second quarter of 1994.

IDS Report 655; IDS, 193 St John Street, EC1V 4LS.

Directors' confidence, page 10

(Photograph omitted)

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