Budget finance revealed MONEY
NICHOLAS DAVENPORT
It was not my intention so much to frighten the poor taxpayer about the mounting cost of government expenditure as to suggest that the local authorities who have to act as agents for the vast capital spending schemes of the central government are not always up to the job. But I fully admit that with the budget coming on 11 April most people are getting scared. So let me try to reassure the fearful by giving the technical financial background to Mr Lawson's budget disclosure last week —the Gower Street secret that this will be the mildest budget since Labour regained office.
First of all, I accept the editor's premise that with private industry stagnating—having lost the confidence which it needs for long- term investment—the public sector can forge ahead with its rising expenditure without the risk of creating an overall inflationary pres- sure. So Mr Callaghan has to confine himself simply to the task of providing finance for the estimated budget expenditure above and below `the line.' It is not as difficult as it might have been if he had had to tax away some excess demand. True, he has to meet a rise in current expenditure in 1967/68 of £660 million and in public sector capital expenditure of £568 million, but huge as these sums appear to be they are not excessive in today's budget arith- metic with total revenues well in excess of £10,000 million.
Mr Callaghan starts with the huge advantage of having framed his 1966/67 budget to pro- duce a surplus above-the-line of no less than £1,047 million. This savage act of deflation was followed by the July measures which were expected to gather in by new taxation a further £200 million. In the face of this gigantic surplus above-the-line—a record for 'forced savings'— there is no reason why Mr Callaghan should want to clap on any further taxation—except, perhaps, on social evils like drugs and gambling.
When we turn to the capital expenditure below-the-line the answer is not so simple. We have never yet had a clear capital budget and the taxpayer is utterly confused by the various loans out of the Consolidated Fund and 'special transactions.' A year ago, after allowing for these loans and for the local authority drawing from emit, Mr Callaghan estimated his borrowing requirements (some- times called 'the over-all deficit') at only £287 million, which he would expect to cover by bonds, certificates and National Savings.
In the coming year the Chancellor has to
* PUBLIC SECTOR FINANCFS 1966/67
Receipts (£ million) Taxes on income and expenditure £9,046 National Health Insurance contributions 1,833 Local rates 1,430 Taxes on profits, rents, interest, divs 2,129 Expenditure (f million) Goods and services £6.496 Grants to persons 2,984 Subsidies 559 Grants abroad 174 Debt interest 1,558 Surplus 2,667
meet a rise in public sector capital expenditure of £568 million and also provide for the issue of government stock to take over the steel industry. It looks formidable but it is, in fact, simple if you disregard the confusing below- the-line budget account and look at the finances of the whole of the public sector. This I have summarised in a footnote,* the figures being based on the 1966/67 estimates given a year ago in the Financial Statement.
The amazing feature of this table of public sector finance is the huge surplus thrown up on current account amounting to no less than £2,667 million. This together with taxes on capital and other capital receipts produced a ,cr' total of £3,061 million to cover the total fixed capital formation which turned out at £3,411 million (£1,522 million nationalised industries, £1,275 million local authorities and £614 mil- lion central government, including grants to the private sector). In other words, only £350 mil- lion was left to be financed by the private sector out of its savings. This was not difficult because personal savings alone were in excess of £2,000 million.
Looking ahead for 1967/68 Mr Callaghan has to find finance for an extra £568 million of which about £350 million is accounted for by the heavier capital expenditures of the local authorities and nationalised industries. If he is not intending to tax incomes more, that is, to augment the forced savings taken from our pockets (which God forbid) he will have no difficulty in meeting it from the voluntary savings of the private sector. Personal savings have risen sharply in the last ten years—from £525 million in 1955 to over £2,000 million last year. Contractual savings alone in the form of life assurance and pension contributions are well in excess of £1,000 million a year.
So Mr Callaghan should have no trouble in getting the life assurance and pension funds to subscribe to any loan he likes to make in the open capital market. He has already been busy. Last October he raised £1,100 million—£400 million in Treasury 61 per cent 95/98 and £700 million in Ex- chequer 61 per cent 1971—and in January this year he offered £900 million of stock primarily to holders of £749 million Savings 2f per cent which is being repaid on 1 May. This was in the form of £500 million of Funding 61 per cent 85/87 and £400 million in Ex- chequer 61 per cent 1972. From the taxpayers' point of view they were expensive high coupon stocks but from the savers' or savings institu- tions' point of view they were popular.
So Mr Callaghan has covered himself— apart from the issue of stock to holders of nationalised steel stock. This may amount in all to nearly £500 million but is chicken-feed for the Chancellor. He has merely to exchange government paper for a valuable under-priced asset which will yield him far more in income than he requires to pay out to the paper- holders. Probably all the steel debenture and preference stocks are already in the hands of the savings institutions who want to acquire
government stock at a discount and I dare say that over half the steel equity shares (about £130 million) are also in the hands of these in- stitutional shoppers in the government bargain basement. I envy Mr Callaghan his command over such incredibly willing lenders.
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