OBJETIVOS

Chancellor: Kenneth Clarke; Prime Minister: John Major (Conservative)

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Ibid. 786

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Ibid. 788

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Context

The first three quarters of 1994 saw strong output growth between 1 and 1.5 per cent quarter on quarter. Unemployment had fallen by over 200,000 since the previous November and the 12-month inflation rate was around 2 per cent, having edged up slightly. The public sector deficit had peaked in 1993 and was to fall over the next few years. The outlook facing the Chancellor in November 1994 was therefore one of the most optimistic since the late 1980s.

Overall Budget Objectives

The favourable conditions were reflected in the tone of the speech. The successes from hard policy choices were emphasised but there was to be no let-up: “We must not now throw away the gains that have been made by turning to some short-term dash for yet faster growth. Growth will be sustained only if we keep the lid on inflation, get public borrowing down further, and push ahead with measures which strengthen the industrial economy”.790 The previous year’s measures were credited with the improvement in the public finances “the public spending cuts and the tax increases that I announced last year remain, of course, quite essential to the strategy of achieving economic recovery”.791 Overall the Budget did not seek to raise large amounts of tax: “Happily, in this year’s Budget, I have no need to raise revenue overall in order to secure the public finances”.792 But the task was also to improve the longer term performance of the economy. The three priorities were to keep the economy on track; to use the economy wisely to create more jobs and prevent a deprived underclass; and to “strengthen the economy in the longer term”.793 The Chancellor did, at various points note that unemployment was far too high and proposed measures to help. Excluding the confirmation of the duty escalators – announced the previous year, the 1994 Budget provided for a modest aggregate remission of taxation. The tax changes were therefore largely exogenous, long-run or ideological.

Major Budget Tax Measures

In the field of personal income taxes, the personal allowance, the threshold for the higher rate tax and the income limit for the age-related allowance were indexed. But the Chancellor argued “I have been able to provide some additional help in two important areas. First, I want to do a little bit more for pensioners”794 and the age related personal allowances increased by more than indexation. Secondly, the 20p lower income tax band was widened “One in five of all taxpayers will now only pay tax at the lowest rate of 20p”.795 The former is a social objective and I classify this as exogenous, ideological. The latter follows many years of income tax reform to get marginal rates down to 20 per cent. I continue with previous categorisations of this goal as exogenous, long-run.

There was a tax remission on National Insurance contributions specifically “to encourage employers to look more favourably on people who have been out of work for some time”.796 There was to be an employer N.I.C. rebate for the long-term unemployed from 6th April 1996. In addition, from 6th April 1995, there was a reduction in the lower rates of employer N.I.C.s as “it must make sense to keep on cutting the burden on employers who create jobs and in particular on those employers who provide jobs for less skilled people”.797 Given the high level of unemployment at the time, and that these measures were designed to tackle it, I classify these as endogenous, supply stimulus.

Some income tax measures sought to raise savings and the supply of capital to businesses. Firstly, Venture Capital Trusts were introduced from 6th April 1995 as “one important way in which we can help small businesses is by encouraging the venture capital industry… I believe that venture capital trusts will make a successful contribution to filling a gap in our enterprise economy by encouraging more people to become venture capitalists”.798 Secondly, TESSAs were extended from 6th April 1995 as “higher savings also have an important role to play in helping sustain growth, by providing additional resources for

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investment”.799 In addition – and justified in the same way – Personal Equity Plans (PEPs) were extended from the same date. I classify these measures as exogenous, long-run.

However, there were also some sizable tax increases. Firstly, there were several anti-avoidance and loophole closing measures for V.A.T. relating to land and property, the restriction of VAT recovery on share issues and prevention of abuse of de minimis limits from 30th November and 1st December 1994. The Chancellor announced “I am delighted that there now appears to be a wide political consensus in the House on the need to close loopholes and to prevent the artificial avoidance of taxation”.800 Being to contemporaneously offset the remissions I classify them in the same way: exogenous, long-run.

Secondly, the fuel duty increase of 5 per cent in real terms, announced in the previous year, was confirmed as “It is an essential part of the plans that I set out last year to deliver healthy public finances as quickly as possible”.801 This justifies the previous categorisation as exogenous, deficit consolidation.

Thirdly, the differential between diesel and unleaded petrol “is becoming difficult to justify in economic, health or environmental terms”802 and therefore they were taxed at the same rate from 29th November 1994. I focus more on the first comments “economic” rather than the latter given the overall budget objectives and categorise this as offsetting the other exogenous, long-run remissions.

Finally, the tobacco escalator increase of 3 per cent in real terms was confirmed. In the previous year this was categorised for future years as exogenous, deficit consolidation.

These major changes accounted for over 70 per cent of the cuts and of the increases.