§ The Chancellor of the Exchequer (Mr. Denis Healey)The fiscal adjustment in both years will come mainly from savings in public expenditure rather than increases in taxation. This is for two reasons. First, although the level of our public expenditure, as a proportion of GDP, is no higher than in some other industrialised countries, it has grown much more rapidly in recent years than has our industrial output, and our industrial output itself is relatively low.
Secondly—and perhaps this is not unconnected with our low level of industrial output—people at work are already highly taxed on their incomes, and face a further drop in their living standards in the coming year. I do not believe that it would be right to burden them with the lion's share of the fiscal adjustment which is now necessary. Inadequate financial incentives to work and to invest could put our economic recovery at risk.
Savings in public expenditure must therefore produce by far the greater part of the adjustment needed. On the other hand, the savings needed are on nothing like the Draconian scale suggested by some outside commentators. I think that there has been a growing consensus 1527 among responsible economists that savage and indiscriminate cuts of up to £5 billion would do irreparable damage both to the structure of our social services and to the prospects for employment. They would imply a massive and immediate contraction of demand which is the last thing British industry wants to see at present.