The initial market reaction to his proposals to 'create a wedge of steadily rising revenue' suggests that he may have leapt the all-important fiscal credibility hurdle while leaving the recovery at no greater risk to further setbacks than before. Indeed, by tackling the deficit in the way he did, Norman Lamont would be justified in arguing that he ensured that once the recovery is under way it will be far more robust than if the Government had left itself open to the danger of a future funding crisis.
By far the most significant aspect of this Budget was the enthusiastic embrace of a medium-term framework for fiscal policy - something for which this newspaper has consistently argued. This was not just a case of mouthing vague pieties about balancing the Budget over the lifetime of the cycle. What Mr Lamont had to do was to show precisely how the fiscal arithmetic was going to add up in the out-years. More than that, he had to commit himself and the Government to carrying through a range of specific revenue- raising measures and to bind his successor to their irrevocability. Perhaps a Chancellor who had not been through the policy debacle of the pound's expulsion from the exchange rate mechanism could have got away with less. But Mr Lamont understood that if he wanted to postpone tax increases, he would have to pay a price in the future. As a by- product, he has surely dealt a further blow to the idiocies of Budget purdah.
Mr Lamont has also been sensible in not being over-ambitious in adopting a more demanding fiscal stance than was required. The objective of a balanced Budget has now been quietly dropped. If the assumptions in the Red Book are to be believed, the PSBR will have fallen from about 8 per cent of GDP to around 3.75 per cent by 1997-98.
In effect, the Chancellor has put in train a fiscal tightening of 1.5 per cent of GDP over a three-year period with economic growth doing the rest. This should stabilise the debt ratio in the region of 60 per cent by the middle of the decade, which is almost certainly sustainable as well as being the figure we are committed to under the terms of the Maastricht treaty. In fact, it is probable that the Government has been deliberately pessimistic in its calculations of future revenues,
particularly company taxes, which are very highly geared to the level of activity in the economy. In which case, John Major should have the option, if all goes well, of making the choice between reducing the deficit more rapidly than planned or cutting taxes before the next election.
As to the actual measures announced by Mr Lamont yesterday, while there can always be grounds for argument, the package was tactically astute. Having fought an election almost solely on the single issue of income tax, it would have been political death for the Prime Minister and his Chancellor to have raised marginal rates and would not have done much good to the economy. To have managed as much sensible tax reform in a basically tax-raising Budget as Mr Lamont has achieved is commendable, especially his exploitation of the new 20 per cent band to erode mortgage interest relief and relief on the married couple's allowance. He can also be pleased with his ideas for helping business and investment. The reduction of the ACT rate should act as a further stimulus to direct investment in the UK, which, more than anything, is helping to raise the performance of British manufacturing.
It was inevitable that there would be something in the Budget which was painful and contentious. There is no doubt that the decision to levy an eventual 17.5 per cent VAT rate on domestic fuel and power came as a shock to many people. Before the Budget, there was a widespread assumption that the scope of VAT would be extended, but the expectation was that a lower rate would be applied to a wide variety of currently exempt items. The arguments in favour of imposing VAT at the full rate on fuel are that it is 'green', that it brings British practice into line with the rest of Europe and that it does not open up the can of worms of variable VAT rates applying to a range of other goods and services. Against that, the effect is certain to be highly regressive and will not be offset to any great degree by the extension of the 20 per cent income tax band by a further pounds 500. The Government can expect some politically damaging tales of hardship to be the price of hitting one sensitive category so hard.
IDEA TO HELP THE JOBLESS
Where Mr Lamont deserves some additional credit is in his announcement that the Government is to begin a series of Workstart pilot schemes to test the effectiveness of subsidising employers directly to take on the long-term jobless. When people fall into the unemployment trap, they lose their skills and their motivation, and employers become averse to hiring them. If Workstart proves to be a success in breaking that vicious circle, it should quickly become a national programme with adequate funding.
If Mr Lamont has performed his balancing act with greater skill than his detractors would have thought possible, his success has been to address the budget crisis without actually making a desperately weak economy much weaker. But it is still the case that the recovery could turn out to be so weak that nobody really notices, or even that we could lurch back into recession. When he says he believes that the monetary easing of recent months is enough to kick-start the economy, he is only making a guess. Thus far, every judgement the Government has made about the length and the severity of this recession has been to underestimate its ferocity. There is still a huge overhang of personal indebtedness that has scarcely begun to be reduced, there are 1.7 million families holding negative equity in their houses who are technically bankrupt until property prices begin to move up, and the banks that are needed to help fuel the recovery are still licking their wounds and repairing shattered balance sheets. What is needed is still lower short-term interest rates - down to 4 per cent within the next few months. The risks of adding to inflation are small and easily controlled. This Budget can only be judged a complete success if it has made the move to lower rates more certain.Reuse content