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In the wake of his reception in Bournemouth, Kenneth Clarke now facesthe music as the Budget looms closer. He is likely to steer clear of someserious issues surrounding public finance which will need to be facedwhoever wins the next Election.

Few political commentators asked to tip the Tory Conference darling of 1996 would have come up with the name Kenneth Clarke. Indeed, if two months ago one had mentioned him as even a possible contender in the Cabinet’s platform beauty contest one would have been laughed out of the room. The Tory representatives, rarely rude to the leaders, were expected to greet the pro-European, tax cut-sceptical Chancellor with something rather less than enthusiasm.

That Clarke drove away from Bournemouth with a standing ovation ringing in his ears is surprising enough. That he did so after confronting this usually intractably dogmatic audience with a defiant reiteration of his stance on tax policy and monetary union is remarkable. It is a measure of the Chancellor’s political stature that he could face the faithful with such unpalatable material and win them over.

The question is can Clarke’s popularity with his party survive his Budget?

He has been constant in his assertion of what he told the conference was the Tory “golden rule”: “We only cut taxes when we can afford to and when it is good for the economy.” The thing is, he seems to mean it – more or less. And more or less the commentators and analysts are inclined to believe him.

All the expectations are that the Budget will contain tax cuts but that they will be relatively modest ones of the order of #3.5bn. That is enough to take 1p off the basic 24p rate of income tax, with more than sufficient left over to extend personal allowances and tinker with the lower 20p income tax band. It will probably not be sufficient, however, to satisfy either Tory MPs terrified for their Commons seats or the Chancellor’s new-found grassroots’ cheerleaders.

But further than that Clarke really dare not go. Not if the apparent importance he attaches to his vaunted consistency is for real.

With rising growth already prompting fears of inflationary pressures, the Chancellor will justify his tax cuts with parallel rises in other taxes, like excise duties, and by spending cuts. Together, he will be able to present these as representing either a neutral or slightly tighter fiscal stance than the one he currently presides over. Even so, the consensus view among observers is that monetary policy will also need to be tightened almost immediately after the election – at the latest. More importantly, however, for all Clarke’s reputation for plain-speaking even this sort of relatively modest pre-election Budget package conveniently ignores some pretty serious questions about the state of the public finances that are going to have to be faced up to – whoever wins.

Two years ago, the Treasury was projecting that by now the public sector borrowing requirement would have been cut to just #14bn. In the 1995 Budget that was revised upwards to #22.5bn. The latest estimate is for a PSBR of #26bn – almost double the original target. Meanwhile Clarke’s official and often-stated objective remains to achieve a balanced budget over the medium term.

According to the authoritative Green Budget produced by the Institute for Fiscal Studies and Goldman Sachs, a balanced budget objective can still be delivered – assuming the government can hit its public spending targets. The Chancellor’s record of doing so has thus far been impressive.

However, as the IFS makes clear, the achievement of that zero PSBR will require “unprecedentedly tight” management. Two questions in particular underline the magnitude of the task.

First, take the issue of the ever-rising proportion of public spending taken by just three main areas: health, education and social security.

Together, the “big three” now consume some 60% of overall public spending.

Moreover, as the IFS points out, all three are what the economists call superior goods so that as people become richer so they seek to spend a greater proportion of their income on these things.

In health alone, spending has risen by 3.5% in real terms since 1978-9 and Major scored political points at the Bournemouth conference with a pledge to keep the NHS budget rising in real terms “year after year after year …” all through another Tory term.

In social security, the government has begun to move down a path which may eventually be followed elsewhere. By breaking the link between pensions and earnings it is forcing people to make private provision and curbing the growth in expenditure. The scale of the problem is such, though, that a difficult choice will ultimately have to be made between higher taxation or radical measures to increase private provision.

The second issue being dodged ahead of the election is public investment, where expenditure is planned to fall by #2bn by 1997/8. Increasingly, ministers are looking to the Private Finance Initiative (PFI) to fill the gap. Yet there are serious doubts not only about the implementation of PFI, which has brought many complaints from companies involved, but also about its fundamental efficacy. In particular, some doubt whether there is a real transfer of risk from public to private sector and, therefore, the benefits to the public purse may well prove illusory in the longer term.

It is also worth noting at this point, the nagging worries about the other, revenue side of the Budget equation.

The reason that the PSBR has shattered its targets is not poor spending control but a surprise shortfall in the tax take. With fears that this may be due to structural changes in the economy rather than cyclical factors, this is under investigation by Treasury officials. One leading candidate among partial explanations is more sophisticated exercises in VAT avoidance by business: something we should expect to see tackled sometime soon.

None of this is the sort of material liable to wow Tory conference audiences, nor television viewers watching the Budget speech. Meanwhile Gordon Brown can be expected to continue to question the Chancellor’s fiscal arithmetic but not to do very much in the way of explaining how Labour would achieve a tax and spending regime it is wont to trumpet as just as tough as the Tories’. This is all the more important if we remember that large tracts of the November Budget may barely have come into effect before Brown is on his feet in the Commons to deliver his own post-election package. Meantime Clarke should be permitted a political moment to savour his conference success. He deserves more credit than many politicians for saying what he means and meaning what he says. But watching the Budget this month we should be looking behind what simple surface truths we find there for a harder reality behind, for that is what really confronts us all.

Gary Duncan is economics correspondent of The Scotsman.

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