§ As well as setting a proper framework for money supply growth, the medium-term financial strategy sets out the Government's views on the proper level of public borrowing in the years ahead. This cannot make excessive demands on the funds available without putting upward pressure on interest rates. That is what Governments in other countries have found out, to their cost. Recent experience throughout the world exposes the myth that big budget deficits are good for growth and employment. On the contrary, a responsible fiscal policy is essential for both.
§ Last year I budgeted for a PSBR of £.10½ billion. Since then output has moved broadly as expected at the time of the last Budget, and the 1981–82 PSBR is still on track for the forecast outcome.
§ Some argue that our fiscal policy is excessively tight, once account is taken of the effects of the recession. I do not accept this. The acid test for the PSBR is the level of interest rates at which it can be financed. My Budget decisions last year took account of the recession, and in assessing the impact of fiscal policy on the economy it is actual spending and tax payments that matter—not hypothetical estimates of what they might have been if the world were somehow different.
§ I know that there are some who say that our interest rates are really determined in New York anyway, and hence that the amount that we decide to borrow is neither here nor there. Such reasoning is mistaken, and the conclusions drawn from it are dangerously wrong.
§ Of course, it is true that international interest rate movements affect the price that we must pay for money borrowed here. But that in no way diminishes the responsibility upon us to choose policies likely to hold our interest rates in the lower part of the international range.
§ Let us remember what happened last autumn. We could not resist the pressures of rates rising sharply all round the globe: we would not have been able to do so whatever the level of our own domestic borrowing. But, because of the firm line taken in my last Budget, our own interest rates, even after the increase in the autumn, did not soar to the levels reached in the financial markets of a number of our competitors.
§ Had I last March thrown caution to the winds, our rates of interest would not have come down last spring, and would have had to go up far higher last autumn. Indeed the £10½ billion PSBR set for the year now ending, and the determined measures that we have taken to achieve it, have again been helping us in recent weeks to bring down the cost of borrowed money.
§ The fact is that, while there are limits to the influence we can have on the world background, we can do something more directly about our own borrowing. The larger the PSBR we start with, the higher the interest rates we shall end up with, and the opposite is also true.
736§ In my coming to a judgment about what we can responsibly plan to borrow in the next financial year, there is one further international dimension which I cannot ignore the recent fall in oil prices around the world.
§ I cannot stress too strongly that a lower level of oil prices, if it is sustained, is basically good news for Britain and for the world. It reduces industrial costs. It helps to lower inflationary expectations. It makes room for a faster growth in output, consistent with the proper monetary discipline which is now so widely applied. And, as the balance of earnings power between the advanced industrial countries and the oil producers undergoes some correction, the weight of highly mobile financial surpluses, which have been such a destabilising influence on world capital markets in recent years, is likely to be diminished. For this reason, the prospects for international inflation, for interest rates, for growth, and for exchange rate stability have all improved in recent weeks.
§ But, for my Budget judgment, this does to some extent work both ways. In part, my task has already been done for me. A drop in oil prices affects our own economy in much the same way as a cut in indirect taxes, or Excise duties, or national insurance surcharge.
§ Lower oil prices reduce costs and prices all round. They leave people in this country with more money in their pockets to spend on other things. They lower the costs of production and distribution. And, in addition—which a cut in our own tax rates cannot do—a fall in the world oil prices promises to increase activity worldwide, and with it the purchasing power of many of our traditional customers in the non-oil developing countries.
§ But that is not the whole story. When the price of oil drops our tax take from the North Sea production is correspondingly reduced. Other things being equal, this would increase the borrowing requirement, though not by as much, since the beneficial effects of the oil price cut boost our revenues from other forms of activity.
§ The prospect is bound to be uncertain. But in determining the size of the PSBR for the year that starts in April I can assure the House that I have made allowance for these factors as we know them today. Obviously, if there was to be a prolonged fall in the oil price, below the level we currently expect, then both the beneficial effect on activity and domestic prices, and the revenue-loss effect on the PSBR, would be increased. It would be wholly irresponsible for me to rule out the possibility of having to take action to correct the fiscal balance if that were to happen.
§ The illustrative projections presented with last year's Budget envisaged a PSBR for 1982–83 equivalent to 3¼ per cent. of GDP. This would be around £9 billion at current prices. In the light of the latest assessment of the prospects, I have thought it right to provide for a PSBR of around £9½ billion in the coming year, equivalent to 3½ per cent. of GDP. This is about £1 billion below the expected outturn for the current year. But it is also about £1.3 billion above what the PSBR would have been next year on the conventional assumptions—that is to say, if the changes to income tax and specific duties which I am proposing today were only to take account of the past year's inflation. That £1.3 billion is the PSBR cost of my Budget proposals in 1982–83. Their net cost to the Exchequer in a full year is over £3 billion, compared with this year's tax and duty rates.
§ The new revenue and borrowing projections published in the Red Book envisage a further decline in the PSBR 737 over the following two years to 2 per cent. of GDP on the assumptions about growth and inflation which are there set out. So the size of the Government's borrowing in real terms will continue to decline from year to year. This will further ease the pressures it imposes on financial markets, and it will assist progress towards lower interest rates and lower inflation.
§ I turn now to expenditure.