As I pointed out a moment ago, a sound monetary policy needs to be buttressed by a prudent fiscal stance.
At one time, it was regarded as the hallmark of good government to maintain a balanced budget; to ensure that, in time of peace, Government spending was fully financed by revenues from taxation, with no need for Government borrowing. Over the years, this simple and beneficent rule was increasingly disregarded, culminating in the catastrophe of 1975–76, when the last Labour Government
had a budget deficit, or public sector borrowing requirement, equivalent in today's terms to some £40 billion.
This profligacy not only brought economic disaster arid the national humiliation of a bail-out by the IMF; it also added massively to the burden of debt interest, not merely now but for a generation to come.
Thus, one of our main objectives, when we first took office in 1979, was to bring down Government borrowing. We steadily reduced the public sector borrowing requirement from the 5¼ per cent. of GDP we inherited to only three quarters of I per cent. in 1986–87. Today, I am able to tell the House that in 1987–88, the year now ending, we are set to secure something previously achieved only on one isolated occasion since the beginning of the 1950s: a balanced budget.
Indeed, we have gone even further. It looks as if the final outturn for 1987–88 will be a budget surplus of £3 billion. Instead of a PSBR, a PSDR: not a public sector borrowing requirement, but a public sector debt repayment. And, incidentally, even if there had been no privatisation proceeds at all, the resulting PSBR, at a half of 1 per cent. of GDP, would still have been the lowest in all but one year since the beginning of the 1950s.
Some two thirds of this substantial undershoot of the PSBR I set at the time of last year's Budget is the result of the increased tax revenues that have flowed from a buoyant economy; while the remaining third is due to lower than expected public expenditure, again the outcome of a buoyant economy: less in benefits for the unemployed, higher receipts from council house sales, and improved trading performance by the nationalised industries.
A balanced budget is a valuable discipline for the medium term. It represents security for the present and an investment for the future. Having achieved it, I intend to stick to it. In other words, henceforth a zero PSBR will be the norm. This provides a clear and simple rule, with a good historical pedigree.
In the very nature of things, there are bound to be fluctuations on either side from year to year. It is in this context that I have to set the precise fiscal stance for the year ahead, 1988–89.
I have already announced, in the Autumn Statement last November, a £2½ billion increase in public expenditure plans for 1988–89, with resources allocated to programmes up by over £4½ billion. This means that, over the coming year, we will be spending at least £1,100 million more on health than in the year now ending, at least £900 million more on education, and at least £500 million more on law and order.
These large increases in public expenditure programmes for the coming year will be financed partly from the saving in debt interest resulting from the reduction in Government borrowing. Debt interest payments now account for about three quarters of a percentage point less of GDP than they did only three years ago. This may riot sound very much, but it implies a saving of some £3 billion a year. And the balanced budget path I have set out in this year's MTFS will help to reduce debt interest payments still further.
We have thus secured an enviable virtuous circle in public finance: lower borrowing and lower tax rates create both the scope and the incentive for the private sector to expand. And the private sector then generates higher revenues which permit further reductions in borrowing or tax.
But even so, the increased public spending now planned for 1988–89 inevitably implies less scope for reducing taxation. Moreover, I have decided that for the year immediately ahead the path of prudence and caution is to budget for a further surplus of the same size as this year's expected outturn—that is to say, a further public sector debt repayment of some £3 billion.
What this means is that it will not be possible in this Budget to reduce the burden of taxation; that is to say, to reduce taxation as a share of GDP. However, the House may be pleased to know that, with a strong and healthy economy, a constant burden of taxation implies a reduction in tax rates.