§ This is the background against which I face my main task in this Budget—to consolidate the gains we have made so far and to create the conditions in which we can get our rate of inflation down and make the necessary improvements in our industrial and trading performance. [Laughter.] I think that the House will have noted that these are aims that both the British and the external markets greatly appreciated last week when there seemed to be some danger that they would be jeopardised by the possible defeat of the Government.
§ I have emphasised many times over the past few months that all these objectives 267 will require some reduction in the present burden of income tax. The representations that I have received have been unanimous in advocating this. Both the TUC and the CBI have argued that substantial reductions in income tax are needed both to make it easier to agree on a satisfactory pay policy and to assist our industrial strategy. The sector working parties have reinforced these arguments by pressing for improvements in the structure of income tax to increase incentives at all levels of industry. I am convinced that working people throughout the country take the same view.
§ My problem in the Budget is to decide how far I can move in this direction this year without weakening the firm control that we have established over fiscal and monetary policy and without putting undue strain on the nation's productive capacity or on the balance of payments.
§ The economic prospect that I have just described gives some room for moving in this direction. There is all too much spare capacity in the economy, though this varies rather widely within the different sectors of industry. The balance of payments should have moved into surplus by the end of the year. The forecasts for the public sector borrowing requirement and domestic credit expansion give me significant headroom. So there is scope for a carefully controlled fiscal stimulus, to make at least a start in expanding domestic demand by reducing the burden of income tax.
§ I must also decide how far the prospect for a satisfactory agreement on pay policy justifies me in offering some of the tax reliefs before formal discussions on pay policy have even begun, still less been concluded. What I have heard about the intentions of the trade union movement and the CBI leads me to believe that a satisfactory agreement can be reached, although I would not seek to minimise the difficulties.
§ I am therefore recommending to the House in the Budget Resolutions which are being tabled today net fiscal action which will cost some £500 million net revenue in a full year. The £500 million package will take effect immediately. When, as I expect, a satisfactory agreement is reached in the coming months on the third round of pay policy, I shall 268 bring before the House further proposals which will cost some £ 1 billion. The combined effect of both parts of the Budget will thus be to reduce the revenue by about £1.5 billion in a full year and to bring the PSBR for 1977–78 to a new forecast level of some £8.5 billion. This is within the ceiling of £8.7 billion agreed with the IMF.
§ Incidentally, it is not sufficiently recognised that the first year PSBR effect of a net reduction in tax is less than the full year revenue effect, partly because some of the revenue effect falls beyond the first year, and partly because the resulting rise in activity cuts unemployment and raises tax receipts. Thus the measures that I am proposing will affect the PSBR next year by only two-thirds of their full-year revenue effect.