§ Control of money needs to be supported by firm control of public sector borrowing, otherwise the result is to push up interest rates and create strains that sooner or later prove intolerable. Other countries understand this. All too many have had to learn the hard way.
§ A substantial reduction in the trend of public sector borrowing over the medium term is a necessary part of the process of reducing inflation. We have made good progress. During the latter half of the 1970s public borrowing represented on average about 6 per cent. of 141 gross domestic product. In 1975–76 the figure was nearly 10 per cent. By 1981–82 it had fallen to 3½ per cent. of GDP.
§ For the year now ending I budgeted for a public sector borrowing requirement of £9½ billion. The outturn is likely to be substantially lower, principally because oil revenues during the current year have been very much larger than could have been expected. The latest estimate of the outturn for this year's borrowing requirement is about £7½ billion—or 2¾ per cent. of GDP. However, the year is not yet over and there are large sums on the expenditure side yet to be brought to account and on the revenue side to be collected. So this year's outturn figure is still subject to a considerable margin of error.
§ For 1983–84 last year's Budget Statement suggested a PSBR of 2¾ per cent. of GDP as consistent with the desired trend to lower borrowing. That is equivalent to about £8 billion at the level of money GDP now forecast. In judging whether that figure is still appropriate I have taken account of developments over the past year and of the main uncertainties which now confront us. On interest rate grounds, there is a clear case for continued fiscal restraint. Interest rates, though lower than they were, are still undesirably high both in nominal and in real terms. The fact that the exchange rate has now moved to a lower level eases the financial pressures on companies, but we need to remember that holding to the medium term financial strategy as inflation falls is the best way of helping the recovery of output.
§ I have also had to consider the implications of the recent fall in North sea and other oil prices. Of course, lower oil prices reduce the value of our own oil production. But North sea oil accounts for only 5 per cent. of our national income and tax on it for only some 6 per cent. of Government revenues. Moreover, the health of a much larger part of our national economy depends on the state of the world economy. Though sharp swings in the oil price are in no one's interest, moderate reductions mean lower inflation abroad and lower prices here. The fall in the general level of world oil prices is therefore to be welcomed. A more prosperous world will in time mean more output and jobs in Britain.
§ It follows from this that it would be unnecessary, as well as impractical, to react to every deviation in the oil market by changing the general level of taxes. The forecast published in the Red Book reflects the prices currently offered by BNOC to North sea producers. Clearly there could be a change in oil prices sufficient to affect the balance of revenue and expenditure in the Budget, though not all the effects would be one way. There is no simple arithmetical guide for dealing with this, let alone allowing for it in advance. Much would depend on the extent of the change and the attendant circumstances. If any further reduction in oil prices seemed likely to compromise the success of our economic strategy, I would be ready to take appropriate corrective action; but the lesson for today is that it is prudent to keep planned borrowing down.
§ Taking these factors into account, I have decided to hold to the previous plan and provide for a PSBR in 1983–84 of 2¾ per cent. of GDP—that is, some £8 billion. Last autumn I announced measures with a revenue cost of some £1 billion in 1983–84. Most of this was directed to reducing the burden on private industry and commerce. It included a cut in the national insurance surcharge.
§ After allowing for that and for the other changes announced in November, the latest forecasts suggest that 142 a borrowing requirement of £8 billion in 1983–84 permits further real tax cuts with a net cost to the PSBR of some £1. billion. The full year revenue costs of my proposals will be rather larger than that.
§ The Red Book gives revenue and expenditure projections for the period up to 1985–86. These allow for a further reduction in public sector borrowing as a percentage of GDP over the medium term. There is of course no certainty about the precise figures, but they show how lower borrowing can be combined with lower taxes within the framework of policies designed to reduce both inflation and interest rates. This was indeed illustrated by my last Budget.