The budget was not quite the cynical attempt to buy the next election for the Tories that everyone expected, writes Paul Anderson. But wait for next year's effort
It was not what had been expected. The backbench Tories and the Tory press had assumed that the income tax cuts would be enough to make an early 1996 general election at least an option; Labour had done the same.
Just a week ago, Gordon Brown was talking about tax cuts of "even 3p, 4p, 5p in the pound" as the sort of outrageously irresponsible election-priming package that Chancellor of the Exchequer Kenneth Clarke would pull out of his battered briefcase on Tuesday; the Tories were looking to precisely the same level of hand-out to get the feel-good factor going.
Instead, it was a damp squib: a penny off the headline basic income-tax rate, 15p on fags, some incentives for savers and a load of dull technical stuff that has little or no popular appeal. The consensus in Westminster is that it means a 1997 general election, almost certainly in May or early June, after next year's income-tax cuts have found their way into pay packets at the beginning of the 1997-98 finan¬cial year.
Labour feels rather pleased that it doesn't have to gear up at once for an elec¬tion campaign; the Tories, for all Michael Heseltine's attempts to talk the tax cuts up as "£9 a week for the average family", are torn between despondency at the fail¬ure of the Chancellor to play his trump card and a sense of relief that the day of reckoning has been postponed. With the exception of the ever-supine Express, the best that the Tory press had to say for it was the Telegraph's sniffy "quite good economics and quite good politics". As far as the Sun was concerned, Clarke "blew a golden opportunity to revive the Tories when he cut income tax by just a miserly 1p". The most important political event of this parliament has turned out to be, well, rather less important than next year's version of the same.
So what was he up to? Clarke is not stupid. He knew that everyone on Fleet Street was expecting at least 2p off the basic rate for Wednesday morning's front pages, and that plenty of MPs on both sides of the House were of similar mind. But he also knew that the markets were expecting a gesture of responsibility – a continued campaign to reduce public borrowing – and that public opinion has turned against tax-cutting in favour of maintenance, if not improve¬ment, of public services.
Most important of all, he knew that his party is so far behind in the opinion polls that an early election would be suicidal. The answer? Try to give everyone a little in the short term, but reserve options after that.
Which is precisely what he has done. The tax-cuts are certainly there, if not quite on the scale expected. There are four crucially important measures – a reduction in the basic rate from 25p to 24p, increases in tax allowances, an extension in the scope of the 20p band of income tax and a reduction in tax on income from interest on savings – the cost of which adds up to around £4 billion next year. The various other tax cuts and increases cancel one another out. In the context of Clarke's stated intentions of getting the basic rate down to 20p and abolishing inheritance and capital gains taxation, the package acts as a tempting hint of what is to come in the 1996 budget, even if it doesn't add up to very much on its own.
But then the £4 billion giveaway is itself cancelled out by cuts in public spending. No matter that some of the spending cuts are achieved by sleight of accounting hand, many are real, includ¬ing those in defence (end of the cold war), civil service bureaucracy (cheap computers) and social security (meanness to the poorest). More important, however, the scale of the public spending cuts in some departments is enough to maintain or increase expenditure in others – at least on paper: more for education, more for the health service, more for the police. The detailed tables in the Financial Statement and Budget Report, the "Red Book", show that the headline increases hide cuts on previous projections in some areas in the longer term, and there are some vicious cuts of which Clarke seems proud, notably the reduction in housing benefit entitlements for the under- 25s. But the political message that the Tories care about the welfare state is convincing enough.
In his presentation of the slicing of the public spending cake – and indeed in the manner of his tax-cutting, which is broadly progressive in its impact – Clarke has stolen a march on Labour's claims that the Tories have lurched to the right since John Redwood's challenge to John Major's leadership this summer. This was a One Nation budget speech, and the more honest Labour observers admitted their surprise at the substance as well as the rhetoric: they had been reck¬oning on a much more brutal "slash-and-burn" assault on spending.
Just as important, the package was carefully designed to please the markets with its prudence. Of course, the figures for public sector borrowing are embarrassingly wide of the mark set down this time last year, the result, according to Clarke, of slower domestic growth than expected caused largely by a downturn in Britain's main foreign markets, which led to a shortfall in government receipts.
All the same, the projection remains that public borrowing is on a steady downward course. Even if Clarke's figures rest on an over-optimistic assump¬tion of growth in 1996-97, the neutrality of his budget – the balance between tax and spending changes – is enough to show the markets that he means business about reducing the PSBR in the medium term. With low interest rates to compensate for his tight fiscal stance (and a little luck with international conditions) it is just possible that he could pull off his trick and give himself space for further tax-cuts next year.
But will it work? There's no doubt that Clarke has adopted a very risky strategy politically, effectively putting a wager on the current stagnation of the British economy being temporary. If he is right, he will have plenty of room for man¬oeuvre next year. But if he is wrong, he could face political disaster. Forget about a full-blown recession: all it would take to make a real mess of his PSBR figures would be for growth to continue as it has in the past six months. If that happens, in November 1996 the Chancellor will have to choose between pleasing the markets (with austerity) and pleasing the voters (whether through tax-cuts or public spending) – unless he can persuade the markets that Britain is facing a dire reces¬sion that necessitates a temporary relax¬ation of fiscal policy.
In the meantime, he is hoping that monetary policy, in the form of low inter¬est rates, will give the economy the vigor¬ous boost it needs to reach his optimistic targets for growth. If the budget was a damp squib, it still leaves Clarke with the initiative. He is in for a nervous 18 months.
THE DOG THAT DIDN'T BARK
Labour breathed a sigh of relief at the budget: Clarke didn't impose a windfall tax on utilities
And so, in the end, Kenneth Clarke decided not to pinch all of Labour' s clothes. Most important of all, he was scathing in his budget speech about the windfall tax on utilities' "excess profits" that shadow chancellor Gordon Brown has promised to pay for Labour's flagship emergency employment programme. "A windfall tax would damage investment and threaten the quality of customer service," intoned the Chancellor. "It is an illusion that a windfall tax is paid by the company. lt is paid by the shareholders, including many small shareholders and pension funds. And it would mean higher future prices for customers. The whole point of privatisation is to benefit customers, not the exchequer. I do not intend to introduce such a tax."
Labour's big fear, given everything that the party had invested in the windfall tax, had been that Clarke would adopt a version of it and watch laughing as Labour cast around desperately for some populist alternative means of funding its programme. The signs of relief when he attacked the windfall tax were visible on the faces of the opposition front bench.
Of course, Labour still has a problem. With the opinion polls in their current state, it would be a big surprise if the public utilities don't make sure that they have nothing like "excess profits" in 1995-96 or 1996-97 as the general election approaches. By their nature, windfall taxes rely on an element of surprise if they are to work: by the time a Labour government comes in, it is likely that the utilities will be virtuously ploughing back their profits into investment.
At least, though, that gives Labour a year, not five minutes, to think up some alternative to the windfall tax, and the windfall tax still has enough life in it to last at least for the duration of the debate on the budget. Labour's other great worry had been that Clarke's tax cuts would be of a magnitude or nature that would make it very difficult for Labour to accept them. In fact, they were nothing of the kind. Blair immediately announced that Labour would not be voting against the tax cuts in his response to the budget speech, and he is unlikely to face a giant backbench revolt for saying it. The way the chancellor has cut income tax, reducing the basic rate, extending the lower rate and putting up allowances is, fort he most part, progressive, and the modesty of the cuts mean it is easy enough for Labour to live with.
Which leaves Labour with only minor problems arising from the budget-unless, of course, Clarke's package has an unexpectedly miraculous effect on the Tories' standing in the opinion polls. lt will be easy enough for the opposition to welcome those elements of the budget that are in line with its thinking – the increases in spending on education, the health service and the police, the measures to help the elderly who need care, the extra taxes on tobacco, or the green-tinged taxes on landfill and on petrol – while denouncing the whole as unimaginative and inadequate, particularly on unemployment and industry, and attacking the Tories for putting up taxes in the past three years.
For the first time since John Smith's pre-election shadow budget of 1992, Labour is helped by thefact that it now has a reasonably worked-out set of proposals of its own. It's not just the windfall tax, designed in Brown's words "to unlock a new solution to long-term and youth unemployment" by providing extra cash for training. Nor is it Labour's alternative tax-cutting strategy, outlined by the shadow chancellor last month, according to which Labour would aim at "a starting rate of income tax of 15p or preferably 1Op" and "cut VAT on fuel to 5 per cent", rather than trying to reduce the basic rate of income to 20p and abolish capital gains and inheritance taxation as the Tories want.
Labour can also legitimately point to its plans for tax-breaks and development agencies to encourage investment, as laid out in its "Budget for Britain" a month ago, its long-standing scheme for releasing receipts from council house sales for new building and its ambitious policies (albeit not yet fully formed)for partnerships between public and private sectors in developing the infrastructure (including a controversial deal with British Telecom under which BT would cable Britain's schools for free in return for being allowed into the lucrative cable market).
Of course, all these measures have their critics. Andrew Dilnot, director of the Institute for Fiscal Studies, described Brown's 1Op income tax proposal as "a con", and the Economist denounced his plans for investment tax breaks as "a gimmick". Others say that, even leaving the BT deal aside, private-public partnerships could well be less of a panacea than Labour thinks and that the release of capital receipts will not have the effect Labour claims.
But Labour's plans are credible enough to impress much of the City, significant parts of industry and many pundits. Whether they work the same magic on the voters, of course, remains to be seen.
