BRITISH government efforts to make room for pre-election tax cuts by substantial reductions in public sector borrowing continue to fail dismally, partly due to overspending by local authorities and partly to VAT revenue shortfalls.
Last month the public sector borrowing requirement (PSBR), the gap between revenue and spending to be met through debt sales, was £3.6 billion sterling, an increase of £100 million on June last year.
Overall, the PSBR for the first three months of 1996-97 was only £600 million lower than last year despite a £1.3 billion increase in receipts from privatisation receipts through the sale of public sector assets.
Excluding privatisation proceeds, the PSBR was actually £700 million higher at £12 billion in the April June period. Most of the increase reflected an increase in borrowing by Labour controlled local authorities.
Significantly, though, the expected growth in tax revenues has failed to materialise. This is due to the emergence of the so called "VAT black hole", a term used by economists to describe the worrying failure of VAT revenue to rise fully in line with economic growth. The reasons for the "VAT black hole range from higher turnover thresholds before firms become VAT victims to growth in VAT avoidance.
Recently, overspending by local authorities and VAT revenue shortfalls prompted the Treasury to lift its forecast for the 1996-97 PSBR from £22 billion to £27 billion which, if achieved, would represent a £5 billion reduction on the comparable 1995-96 figure. Government supporters had hoped that the reduction would provide scope for the Chancellor, Mr Kenneth Clarke, to boost Mr John Major's re-election prospects by unwrapping a plethora of tax cuts in his annual budget in November.
However, pessimistic City seers now believe the 1996-97 PSBR could well exceed £30 billion on unchanged policies, limiting Mr Clarke's scope for cutting taxes. Without tax reductions, the government's re-election strategy will continue to depend on reviving the "feel good" factor by throwing cheap money in the form of low interest rates at the consumer. Strong growth in consumer spending on credit suggests the strategy is beginning to work.
However, the government will still need to translate reviving consumer confidence into reviving support for the Conservative Party.
