§ The Public Sector Borrowing Requirement
§ But it is not intended to achieve this reduction in monetary growth by excessive reliance on interest rates. The Government's financial strategy, therefore, plans a substantial reduction over the medium term in Government borrowing as a percentage of national income. The relationship between the Budget deficit and the growth of money supply is not a simple one. It is erratic from year to year. But there can be no doubt of its importance, or that Government borrowing has made a major contribution to the excessive growth of the money supply in recent years. The consequence of excessive borrowing has been high nominal interest rates and, in capital markets, the crowding out of business by the State. This has held back investment. From now on, however, given the shape of the Government's plans for public spending, the Budget deficit should be reduced progressively to between 1 per cent. and 2 per cent. of output. This would be a little below the average in the 1960s.
§ During a recession, of course, it is widely recognised that the Budget deficit is increased by low tax receipts and high Government spending. Some increase in the ratio of the PSBR to the national income may be consistent with the maintenance of a given monetary target and 1447 without itself requiring increases in interest rates, but in practice public sector borrowing has been too high during the last two years, as experience has shown. That lesson, and the continuing high inflation rate, make a big cut in the underlying deficit imperative this year.
§ In 1977–78, following the agreement with the International Monetary Fund, the public sector borrowing requirement as a percentage of output was 3¾ per cent. of notional income. In 1978–79, after the last Governments relaxation of policy it rose to 5½ per cent. In money terms the latest estimate is just over £9 billion.
§ Despite the expectation of recession, experience shows that it would be wrong to keep the actual PSBR at its current level as a percentage of national income. This could not be reconciled with the monetary target or with the counter-inflationary objectives of the medium-term strategy. We must not make the mistake of promising to correct the underlying weakness at some time in the future but failing to take the necessary steps today.
§ The monetary target that I have announced for the coming year will involve a substantial further slowdown in underlying monetary growth. If we are to meet that target without putting too much of the burden on interest rates, a public sector borrowing requirement of not more than 4 per cent. of national income in 1980–81 is appropriate. This would imply a money figure for the PSBR next year of not more than about £8½ billion.
§ Today's proposals will leave the total yield from taxation not much changed. Taking account of the effect of inflation over the past year and of the Government's public spending decisions, this represents a tightening of the budgetary stance. Indeed, in the absence of the substantial cuts in public spending since my last Budget, a very large increase in the burden of taxation would have been unavoidable.
§ Fiscal Policy in the Medium Term
§ The Government's spending plans are published today in the public expenditure White Paper. They are essential to the financial strategy. The path that we can now plan contrasts very sharply with past experience and intentions. We are not making panic cuts affecting the next year or two, leaving the long-term trend unaltered. We are not just reducing 1448 planned increases. The level of spending is actually planned to fall steadily throughout the next four years. Without these economies, a coherent policy to reduce inflation would be unattainable.
§ Over the next few years receipts of taxes and royalties from North Sea operations will make an increasing contribution to Government revenue. Even so, the growth of revenue over the medium term is broadly dependent upon the growth of national output. This is conditioned by the growth of productivity, the growth of the world economy, and the speed with which we reduce inflation. Since the first oil crisis in 1973 there has been a world-wide decline in rates of economic growth. The growth of output in the United Kingdom has been less than half its previous rate, in spite of the contribution of North Sea oil. The recent rise in oil prices makes it unwise to assume that world and United Kingdom output will expand faster over the next few years than in the past five.
§ The projections for tax revenue in the medium-term strategy, therefore, rest on the fairly cautious assumption that after the recession forecast for 1980 the economy will grow by an average of only 1 per cent. a year up to 1983–84. This will undoubtedly seem rather modest. The economy should be capable of growing faster than this. But we must learn from recent history. In the past, Governments have almost always based their spending plans on improbably high growth rates, which were well above those achieved. To plan spending on over-optimistic growth assumptions can involve actions that, in the event, prevent that forecast growth being achieved. We should take credit for improved growth performance only once we have firm evidence that it has taken root.
§ So in preparing projections of the future of the economy, we must adopt a cautious approach. The Government cannot dictate the rate of growth of output. It is only as inflation subsides that there will be secure foundations for sustainable growth. The 1 per cent. a year that we are assuming is the same rate as was achieved in the years 1973 to 1979. We cannot prudently assume that we shall do better over the next few years, though we have every reason to hope that we can. The sooner inflation comes down, the faster the rate of growth 1449 we can achieve within the monetary framework.