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The London Business School with Gower Publishing
Author(s) -
Dicks Geoffrey,
Breedon Francis
Publication year - 1989
Publication title -
economic outlook
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.1
H-Index - 8
eISSN - 1468-0319
pISSN - 0140-489X
DOI - 10.1111/j.1468-0319.1989.tb00453.x
Subject(s) - economics , excise , position (finance) , deficit spending , wage , prudence , inflation (cosmology) , incentive , current account , labour economics , monetary economics , macroeconomics , finance , market economy , debt , philosophy , physics , theology , theoretical physics , exchange rate
Last year the Chancellor followed “the path of prudence and caution”, cutting taxes by £4bn and budgeting for a public sector surplus of £3bn. This year ‐ rather more compellingly ‐ he is travelling the same route. Against the background of a record current account deficit and rising inflation, Mr. Lawson has tightened fiscal policy, cutting taxes in 1989–90 by nearly £2bn ‐ less than is needed to offset real fiscal drag. His main priority, reaffirmed in the Budget speech, is to tackle inflation and, to this end, he chose not to revalorize excise duties. This was reinforced by a reduction in national insurance contributions, which not only benefits the low paid in relative terms, but also sharpens the incentive to supply labour at the bottom end of the wage spectrum. But this reform of national insurance is not cheap. Even though it is not practicable to implement the changes until October, the cost in 1989–90 is estimated at £1bn, rising to £2.8bn in 1990–1. This is equivalent, in PSDR terms, to a 2 per cent cut in the basic rate of income tax arid, in our post‐Budget forecast, precludes further tax cuts in 1990. Unless there is an unexpectedly large rebound in personal savings, the Chancellor is likely to find himself in his present position in a year's time: presiding over a large budget surplus but unable to reduce it significantly for fear of rekindling inflation or aggravating the current account deficit. Simply writing declining numbers for the PSDR into the MTFS offers no genuine guidance on medium‐term fiscal policy and may even be positively misleading to financial markets.