§ At the time of the Budget last year I expected the public sector borrowing requirement for 1972–73 to be £3,358 million. In the event it is probable that the figure will prove to be some £500 million less than the Budget estimate.
§ There is one important aspect of this matter which is often misunderstood. Over the past year, notwithstanding the size of the borrowing requirement, very little of it has in fact been financed 253 through the domestic banking system. About £1,200 million net of public sector debt has been sold to the non-bank public, and of the remainder of the borrowing requirement about £1,600 million was financed by a running-down of foreign exchange reserves, most of which occurred in June last year.
§ By contrast, the private sector made very large demands on the banking system, and the increase in money supply, broadly defined, was almost equal to the banks' lending to private-sector borrowers. I think it right to put the public sector borrowing requirement into its proper perspective and to scotch the idea that it, and it alone, was responsible for the large growth in money supply last year. That was not the case. Indeed in 1972 the public sector made net repayments of debt to the banks.
§ Coming now to the year ahead, the borrowing requirement will be increased by some £800 million as a result of the once-for-all change in the timing of tax receipts and payments which arise from the new system of indirect taxation. But, as I shall explain, the effect of this £800 million on the claims on resources should be very small. However, including this £800 million and on the basis of my Budget proposals, I expect the public-sector borrowing requirement to be £4,423 million.
§ But it is important to recognise that this in no way resembles a current deficit. The increase in prospective borrowing does not come about because the public sector is raising insufficient revenue to cover its current expenditure. Indeed the reverse is the case. The public sector is expected to have a surplus of revenue over current expenditure in 1973–74 of £3,223 million, which is some £260 million greater than in 1972–73.
§ I should add that the substantial increase in the borrowing requirement arises only partly from the public sector's own current and capital expenditure. Two other factors are equally important.
§ The first is the Governmnt's rôle as a source of finance for third parties—export credits, finance for industry, and so on. The second factor is the one I have referred to—the very substantial change next year, not in overall tax liabilities, but in the timing of tax collec- 254 tion. This is the biggest single factor accounting for the rise in the borrowing requirement and it is, of course, unique to this particular year. As a result of the new arrangement for collecting VAT there will be a temporary interruption of the flow of revenue from indirect taxes, which will mean that the borrowing requirement in 1973–74 will be some £800 million more than it would have been if SET and purchase tax had continued. Of this, £112 million is due to the ending of the SET "forced loan" by industry.
§ This is a once-for-all change and does not alter the underlying tax liabilities as distinct from the timing of revenue receipts. Because of this, its effect on the claims on resources should be very small.
§ Nevertheless, the large borrowing requirement in 1973–74 poses a considerable financing task for the authorities. It would be quite unacceptable to rely to any substantial extent on borrowing from the banking sector.