The economy
Strategist at work
Jock Bruce-Gardyne
With the Christmas turkey and his New Year resolutions CI must make friends with Peter Walker and be nice to Patrick Jenkin') tucked away beneath his belt and decently forgotten, Chancellor Lawson next_ week settles down in earnest to the preparation of his Budget strategy. This is not, as it has been with most of his predecessors, a mere façade. Some of them — Lord Barber, for example — were much interested in fiscal reform but hardly at all in macro-economic management. Others — Denis Healy is an obvious example — looked upon it all as little more than damage limitation, reacting to the cussed- ness of all human affairs. Few, if any, looked far beyond the ends of their noses. Our present Chancellor's passion (in some respects a surprising one for a committed advocate of market discipline) is long-term strategy.
As Chancellor he broke new ground in his first Budget with a three-year program- me of reducing corporation tax and elimi- nating initial capital allowances. This year his ambition is to apply the same treatment to the taxation of incomes and savings.
But first must come the general Budget judgment. Nigel Lawson has far too much capital invested in the Medium Term Financial Strategy to abandon it because it might cramp his style. It is important to understand, however, that the essence of the MTFS is hopeful travel rather than arrival. The prototype unveiled in the spring of 1980 plotted a steadily declining path for money growth from 7-11 per cent in 1980-81 to 4-8 per cent in 1983-4, and for. the Budget deficit from 33/4 per cent of domestic output to 11/2 per cent. Each year since then the forward profile has been adjusted upwards to take account of what has gone before, so that the deadline for 4-8 per cent money growth has eventually slipped out to 1986-7, while the target of a 11/2 per cent deficit has vanished altogether, to be replaced with one of 1-1/4 per cent by 1987-88. What has mattered, though, is that each year's promise should
be better than the latest estimate of what had gone before.
Such is the background to this year's arithmetic. According to the latest (spring 1984) version of the MFTS this year's Budget should record a deficit of £7 billion pounds in the year just ending, and project the same again for the year ahead (result- ing in a fall in the ratio of GDP from 21/4 per cent to 2 per cent). Since then the Chancellor has revised his current estimate to £81/2 billion, and told us that it looks as though he could forgo a net £11/2 billion of expected revenue in his Budget, and still hit his target of £7 billion borrowing for the year to come. But of course neither the £11/2 billion nor the £7 billion is set in concrete. The talk just before Christmas of £3 billion of reserves to spare was not all got up by the press, whatever the Chancel- lor may say. The latest rumours from Great George Street before Christmas were of f3 billion of revenue to spare.
The arithmetic, though problematical, is not that difficult. First you need to assume higher tax income — because the price of oil appreciates more, or depreciates less, than sterling against the dollar, and/or because domestic output or earnings (or both) grow more than had been foreseen. And then there is always scope for dicker- ing with the estimates of borrowing. Assuming that the Budget falls in March 'the Chancellor could — though it might be deemed a little naughty — once again push up his estimate for this year's out-turn (which would not yet be known): to £9 billion, for the sake of example. Then he could reveal that his target for 1985-6 was £81/2 billion: progress in the right direction, but progress that left room for fiscal manoeuvre. Only cads would complain.
It hardly needs saying that your actual figures cannot be slotted in until the eve of Budget Day. The Treasury Select Commit- tee was deeply sceptical before Christmas about the Treasury's hopes of richer fare from North Sea oil. And suppose the oil price fell, they said, as well it might unless by the time these words appear we all have frozen pipes? To which the Chancellor's faithful and quick-footed chief economic adviser, Sir Terry Burns, responded that such a fall could easily be offset by appre- ciation in the value of the dollar — as it has been repeatedly in recent months. But then again it might not be in the future: there's no God-given rule that says that falling oil and dollars cannot go together — for a time at least. So all the Chancellor's sums at this stage must be done on the basis of 'other things being equal' — and knowing that they never are.
Clearly the deep uncertainties now afflicting the oil markets have induced a mood of understandable caution in the Treasury about the scope for net tax cuts in the Budget. But the Chancellor shows every sign of also wishing to play ducks and drakes with existing taxes. Several of the ducks (if they're the sex for culling) have already been put in baulk. The Prime Minister has ruled out VAT on food and new buildings, and any tinkering with mortgage interest relief, while the Chan- cellor himself has assured the Whitehall Sir Humphreys and others that they have no cause to throw in the sponge to save their lump-sum handshakes from the taxman.
It would, I think, be in character — and also an advance to fiscal equity — for the Chancellor to start to tax contributions towards lump-sum payments from here on. But that would not butter many parsnips. The big money comes from schemes (like that of Morgan Grenfell's Philip Chappell, scourge of the pension funds) to treat employers' pension fund contributions as fringe benefits taxable upon their em- ployees. Would Nigel Lawson dare? He might: but I doubt it.
Two VAT or VAT-type extensions I'd lay odds on are newspaper advertising and financial services. Others look to be block- ed by prospective aggro. But these two alone would not do wonders for the Chan- cellor's arithmetic.
As for where the cash is going to go to, the Chancellor and Prime Minister have really set out their stall in unequivocal language. It is tax thresholds, thresholds all the way. We are in for a lot of heavy gunfire from the 'capital expenditure' mob, and it must not be forgotten that three years ago the CBI successfully closed the options with a skilled campaign, via the Government backbenches, for reductions in the National Insurance surcharge. But Nigel Lawson is made of sterner stuff: he will take a lot of shifting.
Even so, a word of caution is in, order.
Since the scope for a major uplift in tax thresholds may be modest this time round, the Chancellor could be tempted to announce a three-year programme as he did with corporate taxation last year. But whereas phasing down the rate of corpora- tion tax and phasing out allowances can be 'revenue-neutral', there is no natural coun- terpart to rising thresholds. They have to be paid for — and massively. Can that payment also be projected with assurance?
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