Tax cuts take priority in UK budget

Date: 14/11/1996

By Tim Jones

WHEN the British finance minister presents his 1997 budget to the UK parliament at the end of this month, meeting the entry rules for the single currency will be the last thing on his mind - or at least that is what he will maintain publicly.

Despite his known sympathy for the goal of monetary union, Kenneth Clarke's position is unique.

Everywhere else in the EU, his counterparts have spent the autumn budget season talking about EMU and little else. Budget deficits have to be cut to the magic figure of 3&percent; of gross domestic product and any means of doing this - fair or foul - will be considered.

Clarke's priority on 26 November will be radically different - to come up with a package of measures which will give John Major's Conservative Party government a chance of clawing back a 13-percentage-point opinion poll deficit in time for an election which must take place by next May.

For Clarke's party, that can mean only one thing: tax cuts.

Rank-and-file Conservatives insist that these are vital if the emerging 'feel-good factor' is to translate into votes. Last year's cut in the basic rate of income tax to 24&percent;, sweeteners paid by mutually-owned mortgage lenders to persuade savers to approve share flotations, and the falling cost of borrowing have finally started to feed through to consumers.

Sales in shops are up and house prices are rising, with the average price of a home increasing by 7&percent; over the past year. Unemployment has fallen by an average of 26,000 a month during the last quarter and economic growth will be about 3&percent; this year.

The only black spot for the government is its own finances. Gone are the surplus years of the mid-Eighties, when privatisation receipts swelled the state's coffers. The Tories have very little left that could possibly be sold. Despite 22 tax increases and rounds of spending cuts since the 1992 election, the budget deficit remains a stubborn 4&percent; of GDP.

In its summer forecasts, the government predicted it would shave 8.5 billion ecu off the public-sector deficit next year - incidentally, hitting 3&percent; of GDP in time for early 1998 when EMU members will be short-listed.

In these circumstances in any other member state, tax cuts would not even be considered. However, the opposition Labour Party leader Tony Blair has stolen so many of the government's other policy clothes that the Tories must demonstrate to the public where the two parties differ. Nowhere is this difference more apparent than over the question of cutting taxes.

For this reason, despite Clarke's protestations that tax cuts have to be earned, the government will almost certainly reduce the basic rate in the budget by at least 1&percent; to 23&percent;.

Voices within his party, and even among think-tanks, have urged him to go further.

Andrew Sentance, an economist at the London Business School and formerly a member of Clarke's 'wise men' advisory committee, has done the number-crunching for them.

He has come up with a programme that would allow Clarke to cut the basic rate of tax by 4&percent; to 20&percent; - the long-term goal of the government.

The only drawback is that Clarke must pay for it. Such a tax cut would cost the treasury 9.6 billion ecu and would be offset by capping some tax allowances, cutting tax breaks for home-buying and raising taxes on insurance premiums, cigarettes and petrol.

As popular as this might be, nothing quite so radical is expected. Much as they want to win the coming election, Major and Clarke are both keen to be remembered as the politicians who laid to rest the 'British disease' of high inflation and out-of-control public finances.

They seem certain to balance any tax cuts with public expenditure savings designed to cut the deficit in line with the Maastricht convergence criteria - targets which Clarke says are “sensible” with or without EMU.

He has also long insisted that the UK should do all it can to qualify for the euro-zone, so that when it comes to the crunch, parliament can genuinely choose whether to go in or stay out, without having its options closed by failure to meet the criteria.

The irony is that it could be a Labour-dominated parliament which makes that choice.