GOVERNMENT plans to cap a dismal fourth term in office with significant tax cuts have been frustrated by sluggish economic growth and missing VAT revenues. When Kenneth Clarke arrived at the Treasury three years ago he quickly concluded that the tax increases planned by his predecessor Norman Lamont were insufficient to restore order to the public finances, which had been ravaged by the recession. He added his own dose of medicine.
This was designed to reduce the Public Sector Borrowing Requirement to 3% of gross domestic product two years ahead of the last date for the General Election. Had he succeeded there would have been plenty of scope for reducing taxes in his last two Budgets. The tax cuts announced in last year's Budget paled into insignificance compared with the extra burdens imposed on the hard-pressed electorate in preceding Budgets. Now it appears Mr Clarke will have even less scope for titillating the electorate this November, always assuming the Government's disappearing majority survives that long.
The Chancellor's economic projections have turned out to be too optimistic. Fear of a resumption of inflationary pressures forced him to raise interest rates in 1994 and 1995 at the same time as tax increases were biting. The economy slowed down. A second recession has been avoided, but activity, especially in the manufacturing sector, has been weak in the past two years. This has blown a big hole in the Government's expected tax receipts. The problem has been aggravated by unexplained shortfalls in VAT revenues which have failed to keep pace with growth in consumer spending.
The gravity of the situation is underlined by the Treasury's latest revisions to the economic forecasts made in last November's Budget.
Mr Clarke now expects growth to be half a per cent less than he expected then. Even this reduced forecast is more optimistic than City pundits reckon is likely. Most Chancellors suffer from the delusion that under their stewardship the economy will do better than in the past. History suggests politicians are more likely to damage the economy than revitalise it. Forced by the facts to abandon his 3% forecast for this year, he has persisted with his belief that 3.25% will be achieved next year.
The big shock in yesterday's revisions by the Treasury was the #8100m increase in the PSBR projected for the 1997-98 fiscal year. At #23bn this deficit will be slightly larger than the one he originally forecast for this year and last. The only saving grace is that the Treasury may have erred on the side of pessimism in its VAT revenue projections. The latest forecast of #27bn for this year's PSBR, which had been widely anticipated, suggests that the tax cuts Mr Clarke conceded in his last Budget were more than the country could afford.
The Chancellor's sidekick in the Cabinet, William Waldegrave, believes that there is further scope for public spending cuts. With spending set to fall in real terms this year and rise only modestly next year they would be deeply unpopular. Mr Clarke himself has recognised the need to increase spending on education and health against a background of tight control elsewhere.
The Government is running out of time. It cannot be prudent in its fiscal policy and generous in its tax cuts.
Surely after 17 years the Government must have worked out that two and two do not make five. Fiscal rectitude must take precedence. The Conservatives may have to be content to leave office with inflation under control, the PSBR on course to fall, and a balance of payments deficit of minimal proportions. Tax cuts that cannot be justified should be forgotten.
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