Costeo Previo de Importación.

Chancellor: Gordon Brown; Prime Minister: Tony Blair (Labour)

817

HC Deb 26 November 1996 vol 286 c156 818

HC Deb 26 November 1996 vol 286 c157 819

HC Deb 26 November 1996 vol 286 c164 820

Ibid. 821

HC Deb 26 November 1996 vol 286 c164 822

HC Deb 26 November 1996 vol 286 c165 823

Ibid. 824

HC Deb 26 November 1996 vol 286 c166 825

Ibid. 826

103

Context

The Labour Party came to power in May 1997 after 18 years in opposition, 18 years where the Conservatives had redefined the use of taxation policy: taxes should be cut to stimulate long-run growth and ensure sound public finances. During the 1990s the Labour Party came to embrace much of this philosophy. Furthermore, they accepted monetary policy as the key stabilisation instrument — making the Bank of England and monetary policy independent in May 1997. Labour’s inheritance was considerably better than the economy they had last managed in the late 1970s. The economy had been growing for 5 years – and GDP growth was just under 3 per cent in 1996. Retail price inflation was around 3 per cent. The claimant count was at its lowest since October 1980 at around 1.5 million. The current account was near balance in 1997 and the annual budget deficit appeared to be moving in the same direction.

Overall Budget Objectives

The 1997 Budget — entitled “Equipping Britain for Our Long-Term Future” – was billed to improve long- term economic performance, employment and opportunity for all. The first tenet of policy was ensuring stability. Monetary policy was the principal short-term reactive instrument and much was made of stable, long-term fiscal policy. The ‘Golden Rule’ was introduced to ensure that, over the cycle, Government only borrowed to invest and that public finances were sustainable over the long-term. There was also a rule for the overall debt to GDP ratio and “To implement those rules, I am announcing today a five-year deficit reduction plan”.827 Much was made of this new long-term fiscal stance and the goal of deficit reduction. However, the Chancellor also argued for a tight fiscal stance as “our sustainable rate of growth is too low for growth to continue at its current pace without the risk of more inflation”.828 In fact the FSBR describes the environment as a “cyclical conjuncture”829and emphasises that “Fiscal consolidation at a time of strengthening demand should help to encourage a more balanced recovery and help to offset some of the pressures on monetary policy”.830 Many Budget decisions were tax increases and whether or not these were endogenous is complicated by the emphasis on long-term growth: “raising the long-term growth rate of our economy is our major challenge”. Consequently, the main priorities were “to invest for the long-term, particularly in skills, to modernise the welfare state and to maximise opportunity for all — the modern route to economic success”.831 Indeed, many of the Budget measures were introduced as long-term reforms to boost performance, encourage stability or for social objectives. But, on balance, these measures appear to be endogenous, deficit reduction — designed to tighten policy when the economy was above trend.

Objectives and Motivations given in the Pre-Budget Report

The November 1997 PBR did not contain any major tax announcements (although some in Budget 1998 were trailed). There were, however, some spending decisions, particularly supporting the Government’s social objectives. The PBR was generally a restatement of the Government’s policies. The Chancellor argued that the 1998 Budget would have to tackle three challenges: increasing the UK’s productivity, the 3.5 million workless households and economic stability”.832 There were also clearer statements that the tax rises in July 1997 were to offset current economic risks, not just to sow the seeds for future long-term growth. The Chancellor claimed that the economy had been overheating: “When we came to power, the economy was already facing yet again the very pressures that have produced the boom-bust instability of the past”.833 He argued that “hard decisions have had to be made on both interest rates and deficit reduction and I am now more optimistic that we are on course to put the economy on track for stable and sustainable growth”.834 The Pre-Budget Report itself also noted “On some occasions, discretionary changes in fiscal policy may provide a useful support to monetary policy —for instance, the fiscal tightening in the July Budget is helping to offset some of the pressures on monetary policy”.835 In this sense fiscal policy was to play more of a role. I will classify many of the 1997 measures as endogenous, deficit reduction because of the specific focus on

827

HC Deb 02 July 1997 vol 297 c304 828

HC Deb 02 July 1997 vol 297 cc304-5 829

FSBR July 1997, page 12 830

FSBR July 1997, page 13. 831

HC Deb 02 July 1997 vol 297 c305 832

HC Deb 25 November 1997 vol 301 c773 833

HC Deb 25 November 1997 vol 301 c773 834

HC Deb 25 November 1997 vol 301 c774 835

104

bringing down the debt. I opt for this over demand management although, as presented here, they are closely related.

Major 1997 Budget Tax Measures

I initially deal with the revenue raisers. First, the Chancellor claimed “I will not allow house prices to get out of control and put at risk the sustainability of the recovery… I have therefore decided that it is right to take two measures aimed at stability in the housing market”.836 Mortgage interest relief was restricted from 6th April 1998. Stamp duty was also increased on properties over £250,000 from 8th July 1997. These measures were designed to cool down the housing market. I therefore classify them as endogenous, demand management.

Secondly, there was a windfall on the profits of private utilities for the four years following privatisation. It was to be paid on 1st December 1997 and 1998. The date of privatisation varies by company and it is difficult to identify retrospective implementation dates. I therefore use the dates for payment, treating this as levies on each date (both being reversed the following quarter). This was specifically motivated as “our reform of the welfare state — with the programme to move the unemployed from welfare to work — is funded by a new and one-off windfall tax on the excess profits of the privatised utilities”.837 I therefore categorise this as endogenous, spending-driven.

Thirdly, the payment of tax credits for both pension funds and on dividends were abolished from 2nd July 1997. Some were maintained until 6th April 1999 for Personal Equity Plan holders, non-tax payers and charities. To deal with this dual implementation I use the 1998/99 revenue change as an approximation of the ‘full year’ cost of the first change and the difference between the 1998/99 and 1999/00 revenue yields as the gain from the second change. It was claimed that this system was not the “best way of encouraging investment for the long-term”. But there were presumably other possible reforms and this raised nearly 50 per cent of the total revenue. Based on the overall Budget objectives, the overarching purpose of these measures appears to be to maintain a tight fiscal stance. I classify these as endogenous, deficit reduction.

Finally, the 5 per cent fuel duty escalator was confirmed by the new Government, but the commitment was extended to a 6 per cent real increase from 2nd July 1997 “In line with the environmental objectives that I have set out”.838 However, in light of the overall deficit reduction plan and the comments about tightening fiscal policy, for this year I classify these changes as endogenous, deficit reduction.

I now turn to the major tax cuts. The main rate of Corporation Tax was cut from 33 to 31 per cent from 1st April 1997: “This is a long-term commitment which will increase both inward investment and domestic investment to the benefit of the whole country”.839 I therefore classify this as exogenous, long-run. In addition, the small companies’ rate was cut from 23 to 21 per cent. The Chancellor noted “new jobs are more likely to come from a large number of small businesses than from a small number of large businesses. The route to success is not for the Government to try to pick winners, but to create an environment in which more firms have more chances, by their own efforts, to succeed”.840 I classify this as exogenous, long-run.

The Labour Party had opposed the Conservative’s V.A.T. on fuel and power and in this Budget the rate was reduced from 8 to 5 per cent from 1st September 1997. The Chancellor argued: “the principle of fairness in taxation will guide all my Budget decisions. I can announce today that at this, the first opportunity, the Government will honour their pledge to cut value-added tax on fuel and power. To help to pay for that, we will withdraw tax relief for private medical insurance for the over-60s [from 2nd July 1997]”.841 I classify both the cut in V.A.T. and the offsetting removal of relief as exogenous, ideological. To cut fuel bills further, the gas levy was reduced to zero from 6th April 1998. The Chancellor argued “To cut fuel bills further, I intend to make a further tax cut. The gas levy imposed by the previous Government has pushed prices for domestic consumers higher than they would otherwise be…Eighteen and a half million domestic customers will benefit from the change”.842 I classify this as exogenous, ideological.

Finally, following a World Trade Organisation agreement in March 1997, the Information Technology Agreement took effect from 1st July 1997. This change cut import duties. I classify this as exogenous, external.

836

HC Deb 02 July 1997 vol 297 c313 837

Ibid. 838

HC Deb 02 July 1997 vol 297 c311 839

HC Deb 02 July 1997 vol 297 c306 840

HC Deb 02 July 1997 vol 297 c307 841

HC Deb 02 July 1997 vol 297 c312 842

105

As the overall objective appears to be a fiscal tightening, I provide an alternative classification of endogenous, deficit reduction for the exogenous remissions in case the tax increases were designed to offset them.

These changes account for nearly 90 per cent of the cuts and over 90 per cent of the total tax rises.