Clarke holds out promise of 20p tax

Chancellor implies last week's Budget was first step towards 'supremely credible' political target

CHANCELLOR Kenneth Clarke indicated late last week that his Budget was the first stage of a plan to go to the electorate in 1997 with a promise to cut the basic rate of income tax to 20p in the pound.

Going considerably further than in his speech on Tuesday, Mr Clarke spelt out the political purpose of his Budget: "What this Budget has done is to make our 20p target supremely credible. It is obvious that this government is delivering policies that will deliver it."

The underlying strategy of the Budget is to prepare the ground for a further cut in the basic rate in a year's time, after which the Conservatives could go to the country campaigning on a commitment to a 20p rate if they remained in power.

The Budget is being described in the whips' office as "a good slow burner". The example of Nigel Lawson's trio of Budgets in the late 1980s, in which he reduced the 30p basic rate of income tax first by 1p in 1986 and then by 2p more before the 1987 election, allowing the Conservatives to campaign on a pledge of a 25p rate is likely to prove irresistible to Tory party strategists.

However, speaking to Sunday newspaper journalists, Mr Clarke hinted that he would proceed more cautiously to the new 20p objective.

"Nigel began to cut taxes like there was no tomorrow," he said. What he wanted to replicate next year was the sense of well-being that people had in the late 1980s.

Mr Clarke's justification of the way he cut income tax - combining 1p off the basic rate with increased allowances and a widening of the 20p lower rate band by pounds 700 - also suggests that he will press for no more than a further 1p off the basic rate in the 1996 Budget.

Responding to charges that he should have concentrated the cuts in income tax on the basic rate, he said: "I've saved the taxcutting from all the political flak that 2p off would have got."

Mr Clarke claimed that any larger tax cuts would have failed the test of political credibility. "If we'd gone for bigger tax cuts, we'd have been accused of bribing the electorate."

Similar political considerations guided the Chancellor's decision not to raise other taxes outside the plans announced in the 1993 Budget, such as increasing duties on petrol and diesel by 5 per cent above the rate of inflation and those on tobacco by 3 per cent in real terms.

"I thought people would shout foul," he said.

Mr Clarke said that the forecast of 3 per cent growth next year was "sensible and defensible". Pointing out that it was only a bit higher than the 2.7 per cent average growth prediction made by independent forecasters, including the Treasury's own Panel, he said that the forecast was "not remotely an outlier".

The Chancellor remained confident that the slowing of the economy in 1995 was no more than a pause and that the conditions were there for growth to resume. "I just remember how quickly we got to 4 per cent last year."

Despite Mr Clarke's claim after the Budget that the growth forecast did not depend on base-rate cuts, many City analysts are convinced that interest rates will have to fall if the recovery is to be sustained. In a post- Budget forecast, economists at Goldman Sachs are now predicting growth of less than 2 per cent next year as companies supply demand from excess stocks. Because of this, they expect interest rates to fall by 1 per cent by the middle of next year.

Responding to scepticism about the scale and sustainability of the spending cuts, Mr Clarke said: "No one's identified any [departments] we've let off." The reform of social security, which accounts for a third of total spending, was "slow acting".

William Waldegrave, Chief Secretary to the Treasury, insisted that he had achieved real cuts. The drive against fraud was beginning to deliver, and the growth in the social security budget was slowing down. Defence had been cut by pounds 500m.

However, economists at Gold- man Sachs said that only pounds 500m of the overall reduction of pounds 3.2bn in public expenditure in 1996/7 came from "genuine spending cuts".