Taxes could be eased in 1995

THE GOVERNMENT may be able to cut taxes as early as 1995, if senior Treasury ministers, led by Michael Portillo, the Chief Secretary, can squeeze public spending even lower than planned.

The Budget targets for public spending will be regarded as ceilings. They will be reviewed at next June's cabinet meeting on public spending, when a decision to aim for an undershoot could be made.

This year's unified Budget brought spending pounds 3.5bn below the pounds 254.9bn control total previously set for 1994/5, and ministers hope the surprising success of the strategy used in the negotiations can be repeated.

Ministers are convinced that they have begun to change the spending culture of government, from one where departments compete for ever larger slices of a growing pie to one where there is permanent pressure on the public sector to improve efficiency and reduce government involvement.

The reserve for unforeseen contingencies has been set at pounds 7bn and pounds 10.5bn in 1995/6 and 1996/7 respectively. If departments can be prevented from drawing on the reserves, they could produce future undershoots in public spending, as this year.

Earlier reserves have often been swallowed by surging social security spending. But following the Budget measures, the Treasury does not expect this to happen in coming years.

Equally, there is less likelihood of an unexpected rise in European Union payments, often another reason for volatility in spending. The Government is expecting a pounds 1.3bn reduction in this bill during 1994/5, following greater-than-planned expenditure of pounds 1.04bn in the current fiscal year.

Further savings could come from lower-than-forecast inflation. The broadest measure of inflation - the GDP deflator, which measures prices across the economy rather than just in the shops - is forecast to be 4 per cent next year and 3.75 per cent in 1995/6. Some analysts believe these predictions are deliberately high and that inflation will be lower, easing the squeeze on programmes.

Ministerial confidence has been bolstered by the change in the way decisions are made.

In the run-up to the Budget, EDX, the cabinet's spending committee chaired by Kenneth Clarke, made clear to individual spending ministers that it was determined to seek cuts in some areas.

The unified Budget meant that ministers knew the more they conceded in spending curbs, the less taxes had to rise to narrow the pounds 50bn borrowing requirement.

Departments were put under pressure to compensate for lower spending with efficiency gains and a freeze on pay bills.

But spending ministers were kept in the dark over the extent to which the Chancellor wanted to reduce the public sector borrowing requirement. Many were also unaware of the extent by which EDX hoped to undershoot the former 1994/5 control total until after they had agreed their individual spending settlements.

Christopher Huhne, page 8