§ I turn next to the public sector borrowing requirement, the PSBR. Some people, I know, are tempted to regard the PSBR as something mystical, of interest only to economists. How I wish that they were right. But, alas, that is not true. The size of public borrowing is, as it must be, a critically important constraint, for Governments are no different from individuals. The PSBR, in plain language, is broadly the difference between what the Government spend, or lend to others, and what they collect in revenue, mainly through taxation. It necessarily includes what the nationalised industries borrow. Most of that comes from the Government, and where they borrow from other sources the Government stand behind them. So the PSBR is the amount central and local government and the public corporations have to borrow. It is the experience of Governments around the world that if they try to borrow too much, either interest rates or inflation, or both, begin to soar.
§ Britain's experience tells the same story. If we are to stay on course for lower inflation and lower interest rates, we must borrow less. Public borrowing, as a proportion of national income, must be brought down. This is why the medium-term financial strategy envisages a downward path for borrowing, as well as for the growth of the money supply. These remain two essential prerequisites for a lasting grip on inflation.
§ Against that background, the House will understand my anxiety at the way in which borrowing has actually developed. For 1980–81, the year which is drawing to a close, the PSBR is now forecast to emerge at £13½ billion, or 6 per cent. of the gross domestic product. That compares with the 1980 Budget forecast of £8½ billion. The lion's share of the £5 billion excess in 1980–81 was accounted for by higher expenditure. There has also been a net shortfall of tax revenue of about £1 billion, with receipts from indirect taxes and North Sea oil below expectations—only partly offset by higher receipts from the other Inland Revenue taxes.
§ For the year now approaching, 1981–82, our published strategy suggested an illustrative PSBR of some 3 per cent. of the gross domestic product. Translated into today's prices that would be about £7½ billion. In 1981–82 output is expected to be lower, and unemployment higher, than envisaged a year ago. The effect of the recession on the PSBR is likely to be even greater this year. It is therefore clear that a £7½ billion PSBR for next year would be unduly restrictive.
§ Moreover, I must tell the House that this year's Budget-making exercise has started from the basis of a forecast for the PSBR in 1981–82 of no less than £14 billion. I am in no doubt that to begin the year with the intention of borrowing as much as £14 billion would be irresponsible in itself and unacceptable to the House.
§ We must consider what should be the objective for next year's PSBR I have already ruled out £7½billion as 764 unduly restrictive. Taking everything into account, I have concluded that it would be right to provide for a PSBR in 1981–82 of some £10½ billion, which is a little more than 4 per cent. of the gross domestic product. This is still a high figure, but I believe it to be consistent with the monetary target that I have just announced. I also believe it to be a sum that can be financed without placing undue strains upon the capital markets.
§ But, as the House will understand, if the figure is to be brought down to £ 10½ billion from £14 billion, some harsh decisions are inescapable. The figure of £14 billion which I have just quoted incorporates the spending plans for next year that have already been announced—but it is otherwise based on unchanged tax rates and unchanged allowances. It allows for the increases in national insurance contributions that I announced last November—which the House has now approved. That leaves a net sum of around £3½ billion to be secured in this Budget: £1 billion of that will come from the new North Sea taxation that I foreshadowed last November. I shall be outlining other proposals later in my speech.
§ These tax changes should enable us to achieve our monetary objectives without having to face intolerably high interest rates. But we are determined to maintain the monetary and fiscal framework necessary for the reduction and defeat of inflation—even at the cost of departing, for the time being, from our commitment to lower personal taxes. The tax increases that I am announcing today are a measure of that determination. Equally, they reflect the bill that we as a nation must meet if we are to pay for the high level of public spending that we have chosen to support. I will return to the detailed proposals shortly.