This week’s British Budget is one of the most cautious in electioneering history as the Tories bank on strong economic growth to keep them in power, writes Alex Brummer
THE central assertion of Kenneth Clarke’s Budget strategy – that his tight fiscal stand removes the need for higher interest rates – does not stand up to anything but the most cursory scrutiny.
What Clarke solemnly presents as a prudent Budget, which avoids election giveaways, squares the arithmetic only with a degree of chicanery. While this may please the chancellor’s Cabinet colleagues, it is unlikely to fool the financial markets.
There are three main areas of the Budget worth closer investigation:
* the economic forecasts, which are unjustifiably optimistic unless the inflation target is thrown to the wind;
* the belief that public spending on infrastructure can be ratcheted down through the private finance initiative; and
* the chancellor’s reliance on “spend to save” to end the shortfall in taxation receipts.
The proposition that these latter measures could draw in some 6,7-billion of revenues over three years – far more than all his other new tax-raising measures together – is faintly preposterous. However, in this last spin of the electoral dice Clarke has had to rely upon mathematical tricks to deliver the trio of enticing tax cuts, a lower public sector borrowing requirement and higher spending on education and health.
The main way in which Clarke aims to increase tax revenue, so as to bring down the borrowing requirement, is by growing the economy at what must be considered an unsustainable rate.
The Budget forecast predicts that growth in Britain will pick up from the current level of 2,5% to 3,5% next year. But rather than being based on what Britain needs, export- led growth, this will be fuelled largely by consumers’ expenditure, which is seen as climbing by 4,25% – an unsustainable level if the economy is not to overheat.
Clarke and his advisers appear convinced that there will be some recovery in exports as the economies of our main markets in Europe pick up speed: maybe.
But he appears to have conveniently forgotten one of the truths of post-war British economic management – that industry has performed best when assisted by a competitive pound.
The 10% jump in the value of the pound since Clarke delivered his 1995 Budget could scramble Britain’s export performance.
Certainly, there is reason to believe that the Bank of England will be none too pleased with the heady consumer spending projections for next year, if it is to have any prospect of keeping inflation within 2,5%.
It believes that domestic demand holds the key to inflation: this will be impossible without further base rate increases.
The second difficulty with the Budget is public spending.
The control total for public spending looks admirably buttoned down at a time when Clarke is giving the traditional boost to the sensitive areas of schools and health, which will be part of the election battleground.
This is partly being achieved, however, by cutting back on capital expenditure – the nation’s infrastructure if one likes.
Net capital spending, which stood at 10,3- billion in the last financial year, will fall to 8,6-billion this year and 6,7- billion in 1997/98.
The decline in capital spending is made possible by taking some projects off Budget through the private finance initiative (PFI), on which 10,4-billion is projected to be spent over the three years to 1999/2000.
However, the PFI has been consistently behind schedule and its effects on the overall Budget numbers overestimated: the result is a slow start to critical projects, less than satisfactory infrastructure and some rather soft budgetary numbers.
The third structural weakness in the Budget is the reliance on less than solid taxation gains. One of the biggest figures mentioned by Clarke was the possibility that his 800- million enforcement of tax collection would raise 6,7-billion.
Even if there were a number of Rupert Murdochs paying only minimal tax, the markets would take a great deal of convincing on this.
Taken at face value, the 19-billion public sector borrowing requirement next year ought to be enough to convince the City that Clarke remains a sound chap. But when one blows away at the swaying supports for this figure, the sirens sound.