§ In controlling inflation, monetary policy must of course be supported by a sustainable fiscal policy. I expect a PSBR in the current financial year of £35 billion—slightly lower than projected at the time of my autumn statement, but, because unemployment tends to increase for a while, even after growth has resumed, and because some taxes, particularly corporation tax, are collected a year in arrears, I expect borrowing next year to rise further. The PSBR for 1993–94 has therefore been set at £50 billion, some 8 per cent. of GDP.
§ Unless action is taken, large deficits will continue over the medium term. The PSBR could still be around 6 per cent. of GNP in 1996–97, the last year of this Parliament. I do not believe that borrowing on that scale is acceptable, and I shall be announcing measures today to reduce it progressively over the years ahead.
§ In the early 1980s, we took steps to bring the public finances back under control. We turned a PSBR of over 5 per cent. of GDP into a surplus of 3 per cent., and we nearly halved the ratio of public sector debt to GDP. We did not shrink from making the necessary changes then and I shall not shrink from making them today.
§ The rise in the PSBR since 1989–90 is largely due to the recession, and, because of the reduction in the national debt in the 1980s, I have been able to allow the so-called "automatic stabilisers"—the increases in public spending and the reduction in tax receipts that directly reflect the weakness of the economy—to operate fully. It was right, I believe, to do this to maintain the level of demand during the recession. However, just as a business cannot go on year after year ignoring a fall in cash flow caused by a downturn in the economy, so too the Government cannot keep on running up debt in the hope that recovery will solve our problems. Even if the higher debt we now face was largely caused by the recession, the extra borrowing still has to be financed. As debt mounts up, so does the debt interest. In this way, what might have started off as a cyclical deficit could soon become a structural deficit unless action is taken to bring borrowing down.
§ All around the world, we see countries striving to reduce their fiscal deficits or suffering from their failure to do so sooner. President Clinton's programme shows that the need for fiscal discipline is now widely understood. The deficit which the Italians are now having to deal with is a salutary warning to those who think that a problem postponed is a problem solved. Those who argue that there is no need for action should confront the consequences of such a course—the consequences not just for the public finances but also for the level of interest rates.
§ For all these reasons, I believe that the greatest threat to sustained recovery in Britain would come not from a lack of demand, but from excessive Government borrowing over the medium term. We have to address that problem now.175
§ Action to bring the fiscal deficit down clearly has to start with the amount that the Government spend. The new control arrangements that I put in place last year were an important first stage, and we now have firm ceilings for expenditure over the next three years that will keep the growth of spending below that of the economy as a whole.
§ But proper control of public expenditure cannot be achieved simply by setting targets. It requires a continuous examination of each and every Department and of all the functions of Government. What was once a desirable role for the public sector may no longer be appropriate today. That is why the fundamental reviews of public spending are so important. Those reviews will inevitably take time, so I have also had to look at the revenue side of the accounts.