New spending adds to tax-cut dilemma pledges add to Budget

PAUL WALLACE

Economics Editor

John Major may have enjoyed winning the acclaim of the conference delegates with his pledge of a return to the tax-cutting trail. Now comes the hard bit: making the sums add up.

It will not be easy. The clearest direct proposal to cut spending was made by Peter Lilley, with his crackdown on asylum seekers, estimated to save pounds 200m. But that reduction was more than outweighed by commitments for extra spending.

Andrew Smith, shadow Chief Secretary, was quick to pounce on the potential cost, saying that the total cost of 5,000 more policemen, doubling the assisted places scheme, the 10,000 extra closed-circuit cameras together with the nursery voucher scheme for four year olds would add up to pounds 500m.

As if that was not enough, Mr Clarke's teases about a Budget he was looking forward to delivering, came on a day in which higher inflation pushed the cost of the social security budget next year up by pounds 650m more than the Treasury had reckoned at the time of the last Budget. Half a billion here, half a billion there and you are talking big money.

If the Treasury's plans for spending next year were more realistic, then the Chancellor might be able to absorb such extra calls for funds from the reserve he keeps in hand for unbudgeted expenditure. At pounds 6bn, he has a lot to play with.

But to take one key claimant, the health department's budget is shown as falling in real terms in 1996-97 by pounds 0.5bn, despite the Tories' pledge to keep increasing health spending in real money. Between 1989-90 and 1994-95, the department's budget rose on average by pounds 1.3bn a year - surely a more likely outcome next year after the run-in over the summer with the nurses and midwives.

Or take education, an area singled out by Mr Major as a priority. The 1 per cent real increase in education spending to local authority-controlled schools this year fell short of the pay award of 2.7 per cent given to teachers.

Certainly, scepticism rules in the City about the Government's ability to make real spending cuts next year. The historical precedents are telling: in the year preceding each of the last three elections, real government spending has jumped by more than its long-term average rate of growth.

None of which will prevent the Chancellor from cutting the all-important income tax next year. By fudging the spending round, allowing the PSBR to rise by more than had been planned and switching the burden of taxation to the corporate sector, he will find the resources to cut income tax.

Whether he can afford to abolish capital gains tax and inheritance tax - a prospect held out by Mr Major - is more questionable. Inheritance tax will raise pounds 1.5bn this year and CGT pulls in just under pounds 1bn.

As for Mr Major's commitment to reduce public spending as a percentage of national output below 40 per cent, that has only been achieved since the Conservatives took office in 1979 in just two years - and then by running the economy hugely above capacity. The jury remains out.