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Public Finance And Fiscal Policy

Volume 205: debated on Tuesday 10 March 1992

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I turn now to the public sector finances. The slowdown in the world economy over the last year has led to larger budget deficits in most industrial countries. Tax revenues and spending on some social security programmes largely depend upon the level of economic activity. So, in a recession, tax receipts are lower while social security spending rises.

But, thanks to my predecessors, we in Britain have the great advantage of having a ratio of Government debt to GDP that is very low by both historical and international standards. Indeed, the general Government debt burden is lower in the United Kingdom than in any other European Community country bar Luxembourg. That means that a rise in borrowing in response to cyclical pressures will not jeopardise the Government's firm commitment to sound finance.

The objective of fiscal policy remains to balance the budget over the medium term. In a recession borrowing will tend to rise. But there is nothing wrong with that, providing that the underlying position is sound and the budget moves back towards balance as the economy recovers. Indeed, it makes good economic sense to allow the level of Government borrowing to vary in this way over the business cycle.

For the year ending on 1 April, I expect a PSBR of a little under £14 billion, or 2¼ per cent. of GDP. The rise in the forecast since the autumn statement is due for the most part to the impact of weaker activity on revenues rather than to higher public spending. Indeed, planned public expenditure this year is likely to be a little below the level that I set in last year's Budget.

Since the full impact of the recession, on both tax revenues and public expenditure, feeds through only with a time lag, the PSBR will increase further in 1992–93. Taking account of the measures that I am announcing today, my forecast implies a PSBR next year of some 4½ per cent. of GDP, about £28 billion.

As I have said, the increased borrowing requirement reflects the delayed impact of weaker activity over the last year. Even so, I expect it to be rather lower than that of Germany, and less than half the level seen in Britain following the recession in the mid-1970s. The ratio of Government debt to GDP will rise slightly next year. But our debt burden will remain very low by international standards. As the economy recovers, and growth gathers pace, the PSBR will move back towards balance, and the debt burden will resume its downward trend.

During 1991–92 the borrowing requirement has been fully funded, and that policy will continue over the year ahead. An increased amount will be funded through national savings. A new product, a guaranteed growth bond designed to appeal to taxpayers, will be launched in the summer.