Taxes or cuts of pounds 15bn

THE Government may have to raise taxes or cut public spending by up to pounds 15bn in the next few years to meet its target of a balanced budget, analysis by the Organisation for Economic Co- operation and Development suggests.

The scale of the fiscal problem revealed by the authoritative OECD - equivalent to raising income tax by 7p in the pound - suggests the Chancellor may be forced to relax his borrowing target but also to raise taxes and curb public spending.

The inter-governmental organisation warns the Chancellor, who will discuss his March Budget options with senior officials at Chevening on 9 January, that 'a significant reduction of the structural budget deficit may be required to convince markets of the government's commitment to a medium-term strategy of low inflation'. .

But the Treasury is not likely to move quickly on public finances. Recession may well delay a significant tightening in policy until next year's second Budget in December.

In its latest Economic Outlook, the OECD takes issue with the Chancellor, insisting that a sizeable portion of the deterioration in the deficit is due to factors other than recession - leaving a so-called structural or underlying budget deficit.

Of the worsening deficit between 1990 and 1992, the OECD believes some 30 per cent is structural and does not reflect recession. After a slight tightening of fiscal policy in 1991, the Treasury loosened it this year by 2.1 per cent of national output, over and above the boost to the deficit due to recession, says the OECD report.

OECD data also indicates that by 1994 Britain will have a structural deficit equivalent to some 3 per cent of national output, excluding privatisation proceeds, or up to pounds 15bn.

This conclusion is based on the hopeful assumption that the Government sticks to current plans to limit the growth of real public spending to 0.75 per cent in 1994 and that the economy grows on average by 2.5 per cent a year.

Holding to current plans will therefore reduce public spending as a proportion of national output and automatically tighten fiscal policy.

However, if the Treasury's new control totals for public spending are exceeded, policy may have to be tightened by more than pounds 15bn to meet the balanced budget goal.

The Chancellor and his officials claim in public that the vast bulk of the deterioration in the budget deficit - forecast to widen to pounds 44bn in 1993-4 from pounds 37bn in 1992-3 - is due entirely to the recession. The private view is different. Early this year, an unpublished Treasury study put the structural deficit at between pounds 5bn and pounds 10bn. The OECD believes it is certainly higher.

Last month, Norman Lamont committed the Government to achieving the balanced budget objective, irrespective of whether the deficit was created entirely by a recession-induced collapse in tax revenues or booming benefit spending.

Assuming the Government holds to its planned spending curbs, net government debt as a proportion of national output jumps to 45.3 per cent by 1994, from 35.6 per cent in 1992.

OECD figures also show that alongside many other industrial countries, Britain has a structural deficit that exceeds public investment plans.

Christopher Huhne, page 8