UK on target to qualify for EMU

Date: 30/11/1995

By Tim Jones

THE UK looks set to qualify comfortably for economic and monetary union, although its government still refuses to say whether it wants to or not.

The UK's budgetary position must be the envy of many of its European counterparts struggling to qualify for a union they are desperate to join.

The budget, unveiled this week, confirmed that the UK's public-sector deficit should fall to 3&percent; of gross domestic product in 1996-97 and into balance as the new century begins. With public debt well below the Maastricht Treaty's targets at 53&percent; of GDP, the UK is one of the best budgetary performers in Europe.

But that's not all. The government was still able to ease up on the fiscal rigour of the past three years and cut the tax burden by 3.7 billion ecu by a 1&percent; reduction of the basic rate of tax to 24&percent;, financed by reductions in public spending.

Chancellor of the Exchequer Kenneth Clarke predicted a rosy economic future in four key areas, claiming public borrowing would fall to balance, state spending would be cut below 40&percent; of national income, the basic tax rate would drop to 20&percent; and inflation would be reined back to 2.5&percent;.

But there is still plenty of room for scepticism. The government's plans and targets are based on forecasts, and experience suggests these can go awry. The public-sector deficit for the 1995-96 tax year was forecast at 25.4 billion ecu or 3&percent; of GDP in last year's budget, but looks like hitting 34.3 billion ecu or 4&percent; of GDP.

The Treasury put the overshooting of the deficit down to slower-than-expected economic growth and weak revenues from taxation. This again was based on an erroneous forecast.

The government had expected growth to be 3.25&percent; this year, but had to scale back to 2.75&percent; as growth slowed across Europe and the US dollar's weakness hit exporters.

Clarke is basing all his new forecasts on an expected 3&percent; growth rate in both 1996 and 1997, led by a revival of consumer spending. But UK consumers, their confidence severely dented by an imploded housing market and fear of unemployment, may not oblige.

Perhaps the most compelling aspect of the budget for the Commission and other members states is the implication that the next UK general election will not be held before 1997.

Those hoping for a UK election before key decisions are taken at next year's Intergovernmental Conference may have to wait longer than expected.