Clarke on the ropes over tax cuts

Diane Coyle,Donald Macintyre
Friday 17 May 1996 23:02

The difficulty that the Chancellor will have in affording tax cuts was thrown into sharp relief by figures showing that the Government borrowed nearly half a billion pounds more than expected in the first month of the new financial year.

Hard on the heels of Mr Clarke's recent admission that the Treasury's earlier forecasts of tax revenues were too optimistic, yesterday's figures suggested that he will have trouble sticking to the spending plans announced in his last Budget.

The Government borrowed pounds 3.3bn last month - pounds 435m less than last April, but only about half the improvement that will be needed to meet this year's pounds 22.4bn borrowing target.

City experts predict that the gap between public spending and revenues could actually turn out to be as high as pounds 30bn. Even so, most expect Mr Clarke to create scope for tax cuts in the next Budget by finding additional reductions to expenditure plans in this summer's public spending round.

With many economists already sceptical that the Government will be able to stick to its already ambitious spending targets, the unexpectedly high borrowing in April was especially disappointing. ''April's spending overshoot does serve to highlight how tough the current spending plans are,'' said Adam Cole, of James Capel.

In the last Budget, the Chancellor reduced the spending planned for this financial year by more than pounds 3bn, and even more in future years, to help pay for the tax cuts that have just come into effect. Public-sector pay rises alone will more than absorb the remaining growth in government expenditure.

The scope for further tax cuts has looked increasingly under threat in recent weeks. The Government hit last year's spending target, but its revenues fell short of the Budget target by nearly pounds 3bn, mainly due to lower-than-expected corporation tax and VAT receipts.

There will also be the unforeseen bill for BSE compensation. The Chief Secretary, William Waldegrave, has put it at pounds 750m this year, but other estimates go as high as pounds 1.3bn.

However, a recovery in the economy's pace of growth later this year could come to the rescue of public finances. Official figures earlier this week showed that, thanks to the tax cuts that came into effect last month, consumer spending power has received its biggest boost since Nigel Lawson unleashed the late-1980s boom. Faster consumer spending would help revive VAT receipts.

Mr Clarke's cautious approach was backed by the former Foreign Secretary, Douglas Hurd, in a speech last night in his Oxfordshire constituency. He said: "Unmerited tax cuts in November against a background of sacked teachers and soaring interest rates would be damaging to the country and fatal to the Conservative Party ...

"People can see a general election a mile off. If the November Budget were to cut taxes and pretend that this was painless, the political reaction would be the opposite of that intended. The markets were not born yesterday. Tax cuts against the evidence of the true state of the economy would produce a rise in interest rates. The markets would make the Chancellor pay more if they suspected that his borrowing was simply for political purposes."

He added that if the cuts were introduced by "genuine big reductions" in public spending, that would be regarded as a "bad bargain" by the electorate.

Clarke's sums, page 18

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