The essence of the Chancellor's strategy has been to show a 'cut' in spending below previous projections by a raid on reserves. In every year up to 1995-96, it is this item that performs the bulk of the task of demonstrating spending control. Such window dressing is perhaps inevitable, given the attitudes of his right-wing colleagues on public spending.
Where the Chancellor has missed the opportunity for achieving genuine balance is in his failure to expand the tax base. Apart from raiding the reserves, it is his optimistic projection of GDP growth in the years beyond 1995- 96 that allows him to achieve the projection of a declining PSBR as a percentage of GDP. It is quite obvious to anyone who examines the Red Book that all numbers beyond 1995-96 have to be treated with caution, since the UK economy has not grown at a sustained rate of 3 per cent per year in recent memory.
The Chancellor should have grasped the nettle of higher taxation more firmly now, since by next year electoral considerations will weigh more heavily and make any expansion of the tax base impossible. Our twin deficits on Budget and trade accounts make it obvious that there is a tendency to over-consume. The Chancellor could have been much more severe on private consumption expenditure at the upper end of the income distribution. These are the people who gained from all those tax cuts that were meant to boost growth, but have merely frittered away the extra money in luxury consumption.
It is a pity that the Chancellor failed to seize the opportunity to move towards a progressive expenditure tax by allowing all savings to be deductible while raising the top rate of income tax. And if he did not wish to tinker with top rates, he could have widened the VAT net while providing compensation to the poorer strata. The net effect of such a move would be mildly progressive.
As it is, we should not achieve the balance as predicted in the central Budget forecast. Lurking in the Red Book is the much more realistic 'lower growth' variant of the projection. At growth rates of 2.5 per cent per annum in GDP beyond 1995-96, there is no fiscal balance achieved even by 1998-99.
But then perhaps the Chancellor is not worried about the prospect of the UK economy beyond 1995- 96. There will be an election for sure before the consequences of the smoke and mirrors tactic adopted in this Budget emerge. He can then, as is his wont, pass on the problems to his successor as Chancellor, Tory or Labour.
Centre for the Study
of Global Governance
London School of Economics
1 DecemberReuse content