'Limited scope' for tax cuts in Budget

THE annual pre-Budget meeting at Chevening, the Foreign Secretary's country house, between the Chancellor, Treasury ministers and senior officials, has ended with the acceptance that scope for tax cuts in this year's Budget is limited. But dangling the prospect of tax reductions will enable Mr Clarke and William Waldegrave, the new Chief Secretary to the Treasury, to resist bids for extra cash from the spending departments.

One of the main questions addressed by ministers and mandarins was how much money might be available to meet the political need to announce reductions in taxes in the 29 November Budget. The other big issue was how to fend off what officials see as half-baked ideas to stimulate the housing market.

The Downing Street policy unit has been canvassing a range of tax changes, including the abolition of inheritance and capital gains tax and a number of housing measures. The Prime Minister has committed himself to making no further changes in mortgage interest tax relief.

The Treasury is keen to regain control of the Budget agenda. Alarming figures for government borrowing so far this financial year have made it clear that keeping the Public Sector Borrowing Requirement (PSBR) close to the Treasury's recent summer forecast totals will be an uphill struggle. Alan Budd, the Treasury's chief economic adviser, will have spelt out the dismal arithmetic at Chevening.

Marion Bell, chief economist at the Royal Bank of Scotland, said: ''We've pretty much been told we will get some tax cuts. But it looks as if the Government cannot really afford to cut taxes within the framework they have set themselves.''

Most City forecasters have revised up their predictions of government borrowing in 1995/96 to pounds 25-26bn. The PSBR total in the first three months of this financial year is the same as it was last year, when it reached pounds 35.3bn. It needs to be pounds 1bn a month lower to meet the Treasury's pounds 23.6bn forecast. The growth of tax revenues has been disappointing.

However, control of goverment spending has been very effective. Last year's total was a little lower than expected, enabling the Treasury to adjust down its spending forecasts for this year and next.

Financial markets regarded the appointment of Mr Waldegrave as Chief Secretary to the Treasury, with responsibility for a difficult spending round, with some scepticism. But officials take a different attitude. ''He is tougher than everyone expected,'' said a senior civil servant.

The main question mark over expenditure in the run-up to the general election will come from pressure on the Government to fully-fund pay awards for groups such as nurses and teachers. It is thought that other bids for extra cash by departmental ministers will be rejected, although the Treasury is concerned about the benefits bill if unemployment starts to rise again.

City economists put the scope for tax cuts in the Budget at some pounds 3-5bn. If spending targets are met, that size of giveaway could be found from the contingency reserve - the unallocated part of total expenditure of pounds 6bn in 1996/97 - without too embarrassing a rise in the PSBR forecast.

Officials have dismissed proposals to stimulate the housing market as gimmicks, either too expensive or too ineffectual. But the Treasury admits that political pressures for action could still become irresistible before November, especially if there is a new outcry when restrictions on benefits paid to unemployed home owners come into force in October. It has therefore been costing the options.

James Barty, senior economist at Deutsche Morgan Grenfell, said: ''Anything like effective tax relief for negative equity or abolishing stamp duty is very expensive. The Government's options are very limited.''

Many outside economists agree with the mandarins that special measures are undesirable. David Owen at Kleinwort Benson said: ''The thing that will stimulate the housing market is higher incomes - anything else is a red herring. The best thing the Chancellor could do is cut the basic rate of income tax.''