§ Given the need to ensure that the Budget deficit is of a size that can and will be soundly financed, lower taxes can be achieved only by maintaining the firmest possible control of public expenditure.
Controlling public expenditure is one of the most difficult tasks facing any democratic Government in the modern world. Public expenditure acquires its own momentum and creates its own vested interests. To control it requires constant vigilance, and a determination to succeed despite the inevitable setbacks. We have that determination, and have succeeded in bringing the growth of public spending below that of the economy as a whole. This achievement has required difficult decisions in successive public expenditure reviews, but there is no benefit to sound economic management or effective control from sticking to public expenditure figures which subsequent events have made unattainable.
As my right hon. and learned Friend the Chief Secretary made plain in the recent debate on the public expenditure White Paper, the normal pre-Budget review of the fiscal prospect has had to take account of changes in the economic scene since the public expenditure review in the autumn. Of these, the most important has been the coal strike, whose public expenditure cost in 1984–85 is estimated at some £2¼ billion—about £1 billion more than allowed for in both the autumn statement and the public expenditure White Paper, which explicitly assumed that the strike would end at Christmas. There will also be some further cost in 1985–86.
It now looks as if this year's public expenditure planning total will be exceeded by nearly £3¼ billion, of which over two thirds is attributable to the coal strike, but, quite apart from the coal strike, the upward pressures on public spending remain intense, not least from increased take-up of social security benefits and further local 787 authority overspending. In addition, since the White Paper was prepared, we have had to accommodate the effects of higher interest rates and a lower exchange rate.
I have therefore reassessed the adequacy of the reserves for 1985–86, 1986–87 and 1987–88 which were provided in the January White Paper. In order to provide a more realistic basis on which to plan and control the level of public spending, I have judged it prudent to add £2 billion to the reserve and thus to the White Paper planning totals for each of the three years. At the same time, I have further increased the estimate for debt interest in each year.
These increases in the size of the reserve will raise the planning totals for the next three years by about 1¼ per cent., but let there be no misunderstanding: the new totals still represent a tough target. No extra cash has been allocated to individual programmes. Calls on the reserve will still be judged on the strictest criteria. There is no slackening in our determination to curb the size of the public sector.
Public expenditure will continue to fall as a proportion of GDP, as it has, the coal strike apart, since 1981–82. Expenditure is planned to stay broadly flat in real terms at about this year's level, excluding the costs of the coal strike. To achieve even these new figures, future public expenditure surveys will have to be at least as tough as their predecessors; and there can be no let-up in the tight control of individual spending programmes within the cash limits set for the coming year.
On the other side of the public accounts, tax receipts, too, are now expected to be higher over the next three years, partly for related reasons, but not by as much. The scope I have for tax cuts this year is therefore only half the amount I said might be available in my statement to the House in November. In other words, the net effect after indexation of the measures I shall shortly announce will be to contribute some three quarters of a billion pounds to the £7 billion borrowing requirement I have set for 1985–86.