Magazine article Management Today

The Chancellor's Big Dilemma: Picking the Right Tax Option

Magazine article Management Today

The Chancellor's Big Dilemma: Picking the Right Tax Option

Article excerpt

The Budget question is one of tax -- whether to increase it, and if so, where.

As harsh winter starts to give way to spring, most of us turn our attention to longer-term prospects. Not so, however, in the Treasury. Since before the first snowdrop tentatively poked its head above ground, the Treasury has had its mind fixed on that mid-March date when the Chancellor of the Exchequer delivers his Budget to the House of Commons.

The ritual has become well-established. In September, a very long list of possible tax changes circulates among selected ministers and officials in the Treasury and Inland Revenue. In November there is the Autumn Statement, setting out the public expenditure side of the Government's fiscal policy. In early January, Treasury ministers and officials gather to decide on Budget priorities. Then these priorities are put through the official mill. The finely honed set of proposals that emerge in March are the result.

This year's Budget is of particular interest, for two reasons. The first is that it will be unveiled against the backdrop of the worst fiscal position faced by any government since Labour's International Monetary Fund crisis of 1976.

Secondly, this Budget will be the last of what is a very British tradition. The next Budget after this one will come, not in a year's time, but in December, and it will be combined with the public spending announcements that have, until now, formed the basis of the Autumn Statement. Out goes the March Budget, in comes the unified tax and public expenditure statement.

The Chancellor did, of course, give us a flavour of the new approach last November, by including tax changes in the Autumn Statement. He also gave notice of some tax increases that we can guarantee will be in the March Budget. The [Pounds] 750 million or so cost of getting rid of the 5% special car tax (a purchase tax levied, in addition to VAT, on the wholesale price of new cars) will, he told us, be clawed back in the form of higher motoring taxes.

The Autumn Statement was also, however, candid in what it told us about the state of public finances. On the Treasury's projections, the public sector borrowing requirement is heading for [Pounds]44 billion, or 7% of gross domestic product in 1993-4, after [Pounds]37 billion, or just over 6% of GDP in 1992-3. Excluding privatisation proceeds, the 1993-4 official projection is [Pounds] 49.5 billion, or 7.75% of GDP.

If the Treasury is correct in its forecast of 1% GDP growth for 1993, then the 1993-4 PSBR will not represent the peak during the present cycle. Goldman Sachs, to take an example, predict a PSBR, excluding privatisation, of [Pounds]60 billion for 1993/4. Then, if the economy's growth returns to trend, the borrowing requirement is predicted to rise to about [Pounds]64 billion in 1994-5 and stay there for the following two years. On a low growth scenario -- of about 1.5% a year -- the PSBR excluding privatisation goes on rising, reaching nearly [Pounds]80 billion, or 11% of GDP, by 1996-7. Move over Italy. Remember that, under the Maastricht convergence criteria, countries were expected to aim for public sector deficits of no more than 3% of GDP.

We should be wary of projections which point to a borrowing requirement that rises indefinitely into the future. …

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