Letter: Kenneth Clarke's Budget: taxes, consumer spending, unemployment and Canada's Tories

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Sir: A detailed examination of Kenneth Clarke's Budget plans exposes two familiar flaws. First, that the real pain of fiscal correction is deferred until 1995-96 and beyond; second, that personal consumption cannot be relied upon to deliver real spending growth, given the stringency of the cash squeeze that is already in place for next year.

The two Budgets of 1993 have together added pounds 8.4bn to the tax burden in 1994-95, pounds 15.2bn in 1995- 96 and pounds 18.2bn in the following year. On my calculations, consumers will contribute 87 per cent of this extra revenue, which will represent average tax increases equivalent to 1.4 per cent, 2.2 per cent and 2.4 per cent of gross personal income for the next three years, respectively.

A yawning gap has opened up between the astral optimism of the Treasury economic growth forecast and the realities of falling employment demand, a higher household tax burden and the prospective stagnation of real wages over the next two or three years. In short, the only choice facing consumers in 1994 is whether it is prudent to save less than the current (11.75 per cent) proportion of after-tax income. Amid contradictory signals from the jobs market and a negligible reduction in personal sector debt burdens during the past two years, the motivation to save is surely as strong as ever.

The only conceivable reconciliation between the projection of faster economic growth and a progressive fiscal squeeze is through rock-bottom short- and long-term interest rates. This is the conclusion at which the financial markets have gleefully arrived. Mr Clarke and Mr George (Governor of the Bank of England) frustrate these expectations at their peril.

Yours faithfully,

PETER WARBURTON

Dunstable, Bedfordshire

1 December

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