§ I now turn to fiscal policy. When we first took office, the public sector borrowing requirement was over 5 per cent. of GDP—equivalent to £25 billion in today's terms.
§ This we steadily reduced over the years as a deliberate act of policy, until, by 1987–88, the PSBR had been eliminated altogether, and we started to repay the public debt.
§ Accordingly, last year I budgeted for a further public sector debt repayment, or PSDR, of some £3 billion. In the event, it looks like turning out between four and five times as large, at £14 billion, or 3 per cent. of GDP.
§ Even if there had been no privatisation proceeds at all, the public finances would still be in surplus, to the tune of some £7 billion. Nothing like this has ever been achieved in the past 40 years. Indeed, Government debt as a proportion of GDP is now lower than at any time since the first world war, and no other major country enjoys a comparable budget surplus. It has not been easy, even though we have been assisted this year by the exceptional buoyancy of the economy, which both boosted tax receipts and reduced public expenditure.
§ Moreover, the substantial net repayment of public debt over the past two years has permanently reduced the burden of debt servicing, both now and for future generations. For the coming year, for example, the debt repayments of the last two years mean that net debt interest costs will be lower by over £1.5 billion a year. This saving is being put to good use, allowing extra spending on departmental programmes within our overall public expenditure constraints.
§ The dramatic improvement in the United Kingdom's public finances has also provided a welcome opportunity to devote more attention to the structure of the debt that remains. We will continue to seek both to minimise the 297 cost of servicing the Government's domestic debt and to improve its quality by relying less on the more liquid borrowing instruments.
§ We have also been able to restructure part of the Government's foreign currency debt, launching an innovative and cost-effective programme of Treasury bills denominated and payable in ECU.
§ The first series of six-monthly tenders for these bills has proved a highly successful innovation. We plan to continue the programme at around the current level.
§ Meanwhile, I am today adding one more entry to the long list of financial controls which we have swept away during our term of office. The last surviving relic of the post-war apparatus for the direction of capital by the state is the Control of Borrowing Order, which, since 1946, has involved, first, the Treasury and, then, the Bank of England in giving consents for equity and bond issues in the capital markets.
§ As from today, it will no longer be necessary for companies wishing to make capital market issues to obtain the Bank of England's consent to the timing of such issues. The new issue queue will be a thing of the past. As soon as practicable, we will revoke the order itself and repeal the 1946 Act from which it stems.
§ The sterling capital market has in recent times been going through a period of considerable adjustment, as the Government have changed from being a large issuer to a large purchaser of their own debt. The abolition of the Control of Borrowing Order will remove an unnecessary and bureaucratic restriction on issuers of capital as they move into the space formerly occupied by the Government when they were a borrower.
§ This new freedom will be enhanced by a further, important set of deregulatory measures for the sterling capital market which are being promulgated today in notices issued by the Bank of England. These measures will open up the market for sterling paper of less than five years' maturity by extending the range of institutions which can make such issues; and they will create a unified regime for all these issues.
§ Taken together, the changes I have described constitute a major liberalisation of the arrangements for London's capital markets. They will give greater flexibility to issuers and wider choice to investors.
In last year's Budget speech, I set out the principle of a balanced budget as the proper objective of fiscal policy, in these terms:
A balanced Budget is a valuable discipline for the medium term. It represents security for the present and an investment for the future. Having achieved it, I intend to stick to it. In other words, henceforth a zero PSBR will be the norm. This provides a clear and simple rule, with a good historical pedigree".—[Official Report, 15 March 1988; Vol. 129, c. 996.]
§ It is a rule that ensures that, as national income continues to rise, the ratio of public debt to national income continues to fall, and with it the burden of debt interest. It ensures, too, that the state makes no claim either on the savings of the private sector or on flows of finance from overseas.
§ To go further than this, and seek to achieve the maximum possible repayment of public debt, would not be consistent with the Government's policy, as it would mean deferring for a very long time the benefits of a reduction in the burden of taxation, so I reaffirm the principle of the balanced Budget. However, given the substantial surplus we now have, the path of prudence and caution must be to 298 return to balance not overnight, but gradually, over a period of years. Thus, we can expect further years of debt repayment ahead of us.
§ Moreover, given the particular uncertainties there are at the present time, I believe it would be right to budget for 1989–90 for a surplus similar to that secured in the year now ending; in other words, a further public sector debt repayment, or PSDR, of some £14 billion.
§ This means that, in the space of three years, we shall have repaid roughly a sixth of the public debt that has accumulated over more than two centuries, but it also means that it will not be possible in this year's Budget to reduce the burden of taxation; that is to say, to reduce taxation as a share of national income.