Sir Geoffrey dissents
I have seen a number of reports describing the budget which I presented [in March] as "deflationary." Indeed, some have suggested that we are repeating the mistakes of the 1930s in the reducing the government's deficit at a time of already severe recession.
I do not accept this analysis at all. I suspect it is based on consideration of the budget's tax increases in isolation. It ignores the overall fiscal changes, including expenditure increases due to the recession, and completely fails to take account of our overall economic strategy.
We came to office at a time when the British economy had been declining for many years relative to the other industrial economies, with both inflation and unemployment on a rising trend over a period of years. We had to tackle long-standing and deep-seated problems. But we recognized -- unlike some of our predecessors -- that the power of government to secure economic success was limited.
Our strategy was therefore to create the right conditions for a return to steady growth. First, inflation had to be controlled. Second, the supply side of the economy had to be improved by reducing the burden represented by the public sector and by removing unnecessary controls. We have made good progress in both.
The British economy has shown a chronic tendency to experience higher inflation rates than most other industrialized countrieS. This means we must put the defeat of inflation first, ahead even of the important goal of reducing the burdent of taxation on the supply side of the economy.
It would be criminal to slacken off at this stage, despite the high level of unemployment -- which has arisen partly from the world recession and the oil price-rise and partly from excessive increases in UK wages. The budget measures were part of a medium-term strategy. They were designed to consolidate our success in reducing the inflation rate. That is the context in which they should be seen.
The tax increases also have to be set alongside our expenditure decisions. Last year we made plans which allowed for a fiscal deficit in 1981-82 of L7.5 billion. This year we have raised that to L10.5 billion. The additional L3 billion reflects the effect of the recession on spending and taxation. There is nothing deflationary about that.
What I did do, faced with the prospect of a deficit of about L14 billion on unchanged tax rates, was to take sensible action to bring it down to L10.5 billion. Not to have done so, or still more to have expanded the growing requirement, as some have suggested, would have prevented us from cutting interest rates and risked reversing our successes against inflation.
Our main weapon in the fight against inflation remains sustained control of monetary growth -- whose importance is of course widely recognized in the US and almost everywhere in the world except in certain British universities. Over the last few months, recorded monetary growth has slowed, a we predicted lat autumn. This has enabled us to reduce interest rates, which are now lower in the United States.
As for public expenditure, despite difficulties, we have also achieved a lot. We have set ourselves a more ambitious objective than most countries: we plan a lower volume of spending at the end of this Parliament than we had at the beginning. We have made a lot of progress. Total public expenditure this year will be some 5 percent below the level planned by the previous administration.
This will help us continue the task of reducing the burden of direct taxation. In my first budget I reduced the standard rate of income tax, reduced the maximum marginal rate of earnings from 83 percent to 60 percent, and uprated the thresholds at which tax becomes payable at the various rates by anything from 18 percent to 50 percent. Last year I increased allowances by about 18 percent. I was not able to increase them again this year, but the rates of income tax have n ot been increased either.