New Statesman & Society, 2 December 1994
Kenneth Clarke's second budget was a bore – but the
Chancellor has set himself up for massive cuts in income tax this time next
year. Paul Anderson reports
It was, as the official Financial Statement and Budget
Report put it, "broadly neutral in its effects on the public finances,
given the changed paths of output and inflation since last November". But
Kenneth Clarke's package on Tuesday is carefully designed to give him the
maximum room to deliver pre-election tax-cuts this time next year.
As expected, Clarke decided not to cut taxes. Instead, he
used the windfall he has been given by lower-than-expected inflation and
higher-than-expected growth to make drastic public spending cuts in cash
terms and to revise the timetable for
reducing Britain's public sector borrowing requirement. The Treasury believes
that the PSBR should be down to zero by 1998-99, two years ahead of last year's
estimate. Of course, all these projections take as given the massive tax hikes
and spending cuts announced last year: as Tony Blair said in his reply to
Clarke in the Commons, there was little in the budget to alleviate the effects
of the medium-term austerity programme that is underway apart from extra cash for
pensioners to compensate for 17.5 per cent VAT on fuel.
Income tax cuts were limited to small increases in the
tax-free personal allowances for pensioners and a small expansion of the band
on which tax is payable at the lower rate of 20p in the pound. In macroeconomic
terms, the budget's measures to combat unemployment are also minor, as indeed
are the tax-breaks for investment in small businesses and the compensation to
firms hit by rate increases.
In any case, the effects of such measures are to a large
extent counteracted by further cuts in public spending on top of those already
in the pipeline. Although Clarke decided to increase spending on the health
service and the police, the more significant changes in expenditure are a
squeeze on central and local government administration costs, long-term
reductions in housing benefit payments to local authorities and savings from a
clampdown on social security fraud. Overall, the total effect of the budget's
changes amount to a cost to the exchequer of a paltry £1 billion in 1995-96
and less in subsequent years.
In the context of the rigour of i993's austerity, Tony Blair
was right to denounce this as a harsh budget. The Chancellor did nothing on
Tuesday to make himself popular, and Labour will be able to milk outrage about
VAT on fuel and dissatisfaction with stagnant living standards well into next
year.
But the budget is not without its problems for Labour. Most
important, there can be no doubt that Clarke has set himself up skilfully for
generosity closer to the election. On the Treasury's figures, he should be able
to cut up to 5p off the basic rate of income tax next year. And if the
assumptions on inflation and growth on which the budget's projections are based
are, like last year's, pessimistic, he could go even further.
The Treasury forecasts GDP growth of 4 per cent in 1994-95
declining to 2.75 per cent from 1996-97 until the end of the century. Yet the
likelihood is that, with the economies of continental Europe and Japan
recovering rapidly over the next couple of years, British growth rates will be
sustained. On inflation, although the Treasury's forecast of a slight increase
in 1995-96 is probably correct – due to pressures caused by falling
unemployment and commodity prices rising as a result of recovery in Europe and
Japan – it would be no surprise if the rate remains as low as it is now.
For all Blair's confidence on Tuesday, Labour knows this – and
the alarm bells are beginning to ring. The Labour line that the Tories are the
party that increased taxation after promising to reduce it has worked wonders
so far and is not obsolete yet, but it will be difficult to sustain after
November next year if Clarke is able to unveil thumping income tax cuts.
There are other, less important, difficulties for Labour in
the way that Clarke has stolen Labour's clothes in several key areas. He made a
big point on Tuesday of his enthusiasm for bringing private-sector capital into
the public sector John Prescott-style, and his declaration that "in some
cases, taxes actually do some good, by helping markets work better and by
discouraging harmful or wasteful
activities" could have been taken out of a Labour (or Liberal
Democrat) environment document.
But the most important steal was over the question of what to
do about unemployment. The worst that Labour can say about the
anti-unemployment measures announced is that they are too little, too late – for
in principle they are precisely the sort of things Labour has been thinking
about itself since it joined the post-Keynesian consensus and decided (as
Clarke put it eloquently on Tuesday) "that demand expansion on its own is
not enough to produce a sufficient fall in unemployment".
For a start, there is a string of incentives for employers
to take on people who have been out of work, particularly the long-term
unemployed: rebates in employers' NICs for employees taken from among the
long-term unemployed plus overall reductions in national insurance contributions
paid by employers for low-paid workers, expansion of "work trials"
schemes allowing employers to try out unemployed people for three weeks while
they continue to claim benefit, grants for employers taking on the long-term
unemployed. All these measures are in line with what Labour has been arguing
for years.
Similarly, Clarke's ideas for using the benefit system to
ease the transition from unemployment to work and from part-time to full-time
employment bear a remarkable similarity to those commended last month by the
report of the Commission on Social Justice: speeding up Family Credit and
housing benefit payments to people starting low-paid jobs after unemployment,
grants for initial work expenses, a tax-free "back-to-work bonus"
for people coming off income support after doing some part-time work, extra Family
Credit for low-paid people working more than 30 hours a week, more Community
Action places, a pilot scheme for a new benefit for childless couples and
single people who take low-paid work. The last of these is particularly
significant, because it indicates that the Tories are seriously considering
responding to Labour's proposals for dealing with poverty pay by way of a minimum
wage by extending the benefit net to those low-paid workers who can't claim
Family Credit.
So although it's undoubtedly a
"steady-as-she-goes" budget, and as such a grave disappointment to
everyone who was hoping for some relief from austerity, it" s also
extremely cunning. Clarke might not be able to prevent his party tearing itself
to pieces over Europe – indeed, he could well exacerbate the divisions with his
unashamed pro-Europeanism – but he's doing his damnedest to make sure that his
economic policy is as suited to the Tories' electoral needs as it can be. This
budget won't rescue Dudley West, but it could pave the way for a credible
general election campaign.
