§ Though there is nothing sacrosanct about the precise mix, monetary policy must always be supported by an appropriate fiscal policy. That means, in plain English, keeping borrowing low.
The outturn for the public sector borrowing requirement in 1984–85, which had to bear the bulk of the cost of resisting the coal strike, was £10 billion, or just over 3 per cent. of GDP. In my Budget last year I planned to reduce it substantially in 1985–86, to £7 billion, or 2 per cent. of GDP. In the event, despite the loss of £2 billion of north sea oil revenue, this year's PBSR looks like turning out at a little under £7 billion, given that the total for the first 11 months of this year comes to under £3 billion.
This successful outcome, which represents the most substantial reduction in the PSBR as a proportion of GDP since 1981–82, is attributable to two factors. First, public expenditure has been kept under firm control. Not only is the outturn likely to be within the planning total, but spending in 1985–86 is expected to be below the previous year's level in real terms, even after allowing for the 171 effects of the coal strike. The second factor behind the successful PSBR outturn for 1985–86 is that the £2 billion shortfall in oil revenues has been offset by the increased buoyancy of non-oil revenues, reflecting a healthy economy and an increasingly profitable corporate sector.
Last year's MTFS indicated a PSBR for 1986–87 of £7½ billion, or 2 per cent. of GDP. Some would argue that, in the light of the £2½ billion increase in projected privatisation proceeds, I ought to aim well below that. Others on the other hand would claim that, since the sharp drop envisaged in oil revenues is more than double the rise in privatisation proceeds, a higher figure would be appropriate.
As last year, my judgment is that the wisest course is to stick broadly to our pre-announced figure, but, given the uncertainties over the oil price, I have decided, within that framework, to err on the side of caution, and provide for a PSBR of £7 billion, or 1¾ per cent. of GDP.
Needless to say, that does not enable me to reduce taxation by anything like the £3½ billion foreshadowed in last year's MTFS. Indeed, given the assumed loss of £5½ billion of oil revenues in 1986–87, compared with what was envisaged a year ago, I would have expected to have had to increase taxes in this year's Budget. However, not only have the tax revenues this year from the 95 per cent. of the economy that is not oil proved to be notably buoyant, but there is every sign that this will continue into 1986–87, assisted by a rather higher rate of economic growth than was foreseen in last year's MTFS.
The continued vigour of the non-North sea economy, which is likely to add well over £3 billion to expected non-North sea tax revenues, coupled with public spending which remains under firm control, has transformed what might otherwise have been a bleak prospect. As a result, I am able this year to accommodate a relatively modest net reduction in the real burden of taxation, of a shade under £1 billion. It may well be that the oil price turns out to be different from the average of $15 a barrel, which I have assumed for this year's Budget, but if any departure is purely short term, it is most unlikely to have any significance for policy.