Budget: Cautious Clarke sets stage for big election tax cuts

Kenneth Clarke yesterday held out the prospect of big tax cuts in the run-up to the next election. In a steady-as-she-goes Budget, Mr Clarke included a pounds 680m plan to tackle unemployment and a forecast that he would eliminate government borrowing in five years.

But the Chancellor rebuffed demands from rebellious Conservative backbenchers to make big tax cuts now or to abandon the rise in VAT on fuel planned for next April. Mr Clarke announced a tax cut of pounds 1bn, offsetting only a fraction of the pounds 6.6bn of tax increases that are in the pipeline for next year. The measures announced in the last two Budgets will leave 85 per cent of households worse off next year.

''I have said many times that I would like to go further [with tax cuts] and that I will in due course go further,'' Mr Clarke told the Commons. But he warned that confidence in economic recovery would be threatened ''if we now seemed to falter or even go back on any of the measures that we have already put in hand''.

Mr Clarke none the less went some way to address the anger over tax on fuel. He announced more grants for home insulation, bigger cold weather payments for the elderly and increases in pensions to compensate for the rise in VAT on fuel announced last year.

City economists gave a lukewarm reception to the Budget, concluding that it made an early rise in interest rates more likely. ''The Budget is not tight enough to prevent further hikes in interest rates,'' said Jeremy Hawkins of Bank America. He expects base rates to rise by half a point to 6.25 per cent early next year.

Keith Skeoch, economist at James Capel, said the Budget allowed Mr Clarke to announce next year that he was cutting the basic rate of income tax to 20 per cent, but could still bring the Government's finances back into the black in the next few years.

The new tax changes to take effect next year were pretty small beer. By widening the lower income tax band by pounds 200, Mr Clarke increased the number of people who pay income tax at 20 rather than 25 per cent. He also increased the amount the over-65s can earn before paying income tax.

Duty on cigarettes and petrol was raised by well above the rate of inflation, adding 10p to the price of a packet of cigarettes and 2.5p to a litre of petrol. But duties on alcoholic drink were frozen because increases would simply encourage people to buy more of their drink on cross-Channel trips. Gaming machine licence duty will be extended to video and quiz amusement machines.

Mr Clarke said his 13-point package to boost work incentives was intended to ''get people back into work and out of dependency on benefits''. It combined pounds 375m of extra government spending and pounds 305m of tax cuts, although the Treasury hopes these sums will be recouped as get back into work and pay more tax. Officials believe the package could cut unemployment by 100,000 - 1 in 25 of the jobless total.

The package included a cut in the rate of National Insurance contributions which employers have to make for low-paid workers. This will be combined with a one-year holiday from these contributions for companies taking on people out of work for two years or more. Employers' NI contributions could be cut further using revenue from a tax on waste disposal in landfill. ''I want to raise tax on polluters to make further cuts in the tax on jobs,'' said Mr Clarke.

The payment of housing benefit and family credit is to be speeded up and a pounds 10 premium will be added to family credit for people who have children and find full-time work. Pilot schemes will extend family credit to childless couples and single people.

Measures in the Budget to help business include help for increases in rates, lower insurance premiums for exporters and looser regulations on VAT, National Insurance and income tax for small firms.

The double bonus of rapid economic growth and low inflation over the past year allowed the Chancellor to make big cuts in the plans for government spending announced last November. Lower inflation means the Government can provide the same goods and services for a lower-than-forecast cash outlay.

The Chancellor cut the ''new control total'' - which encompasses 85 per cent of government spending - by pounds 6.9bn for next year to pounds 255.7bn. The core spending plans in the two following years were both cut by more than pounds 8bn. After taking account of inflation, those plans are lower than those announced last November, although real spending in the current financial year will be higher than expected.

Transport saw a particularly big cut in its spending plans, with the Treasury hoping that the private sector will fund more of the public sector's capital spending projects. An overspend this year in social security is to be reined in with an attack on fraud and cuts in housing benefit. House buyers may also have to take on unemployment insurance because income support will be withdrawn from mortgage payments for nine months, perhaps adding 7 per cent to monthly mortgage payments. The health service and the police emerge as winners from the spending round.

The cuts in public spending plans allowed the Chancellor to make big cuts in his forecasts of the Public Sector Borrowing Requirement. These were augmented by higher estimates of privatisation proceeds, but offset by lower tax revenue.

The PSBR is expected to be pounds 21.5bn next year, compared to the pounds 30bn forecast last November. The PSBR estimates have then been cut by pounds 13bn and pounds 5bn for the following two years. This means the Government expects to run a surplus of tax revenue over spending of pounds 1bn by 1998/99, rising to pounds 9bn in the next year.

Mr Clarke forecast that the economy would grow by 4 per cent this year and 3.25 per cent next year. The underlying rate of inflation is expected to peak at 2.5 per cent next year before falling again, while the current account deficit is expected to shrink to pounds 3.5bn in 1995 from pounds 4bn this year.