§ I turn now to public borrowing. Just as the classical formula for financial discipline—the gold standard and the balanced budget—had both a monetary and a fiscal component, so, too, does the medium-term financial strategy.
§ The MTFS has always envisaged that the public sector borrowing requirement would fall as a percentage of gross domestic product over the medium term. By 1981–82 we had brought it down to 3.5 per cent. of GDP.
§ Since then, however, there has been little further fall. The latest estimate of the PSBR for the current year, 1983–84, remains what it was in November—around £10 billion, equivalent to 3.25 per cent. of GDP. This is significantly above what was intended at the time of last year's Budget and would have been higher still had it not been for the July measures.
§ We now need a further substantial reduction in borrowing in order to help bring interest rates down further as monetary growth slows down. Sterling interest rates are, of course, also influenced by dollar interest rates; but that makes it all the more important to curb domestic pressures. In contrast to virtually the whole of the post-war period, United Kingdom three-month and long-term rates are now lower than American rates. As long as American rates remain near their current level, it is highly desirable that this advantage be maintained.
§ The higher level of asset sales we are planning as the privatisation programme gathers pace is a further reason for reducing the PSBR significantly in the coming year. Asset sales reduce the Government's need to borrow. But their effect on interest rates may be less than the effect of most other reductions in Government spending programmes.
§ Last year's MTFS showed an illustrative PSBR for 1984–85 of 2.5 per cent. of GDP, equivalent to around £8 billion. But I believe that it is possible, and indeed prudent, to aim for a somewhat lower figure, I am therefore providing for a PSBR next year of 2.25 per cent. of GDP, or £7.25 billion.
§ The House will recall that in November I warned that on conventional assumptions, including the 1983 Red Book's PSBR figure of £8 billion for next year, I might 291 have to increase taxes slightly in the Budget. I am glad to report that the latest, and more buoyant, forecasts of tax revenue in the coming year have improved the picture. A PSBR of £7.25 billion will require no overall net increase in taxation.
Moreover, while the measures I shall shortly announce will, after indexation, be broadly neutral in their effects on revenue in 1984–85, they will reduce taxation in 1985–86 by well over £1.75 billion. And the MTFS published today shows that there should be room for further tax cuts not only in 1985–86 but throughout the remainder of this Parliament, provided that we stick firmly to our published plans for public expenditure to 1986–87 and maintain an equally firm control of public spending thereafter.