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Tuesday, 24 March, 1998, 09:12 GMT
Mr Brown's Budget
Evan Davis
It must be pretty galling for the Chancellor to see the reaction to his Budget. There he is, concentrating on a reform programme which looks at the real economy, the supply-side, and microeconomics, in a Budget that largely ignored the macroeconomic fine-tuning of some predecessors. But then the markets take over, read it as too lax, assume interest rates have to rise, and send the pound to a nine year, unsustainable high. The macroeconomics he has intended to play a small role as an extra, persists in moving to the front of stage and overwhelming the main actors.

But has the city got is reaction the wrong way round? There are two interpretations of the news the Chancellor released on the public finances, and there is some chance that the city interpretation of the Budget deviates from that of the Monetary Policy Committee, which actually sets interests rates in the UK, as opposed to just making guesses about them. It may be that the MPC will interpret the public finances as tight, rather than lax. And in that event, the city may end up having to retreat from its hysteria for ever-higher expectations of interest rates.

Here is where the difference in interpretations might arise. Essentially, there was good news in the Budget 'Red Book'about the amount of revenue the Government has been collecting in recent months. The news implies a PSBR for the year just finishing some eight billion pounds smaller than the Chancellor was expecting in his Budget last July. One interpretation of this is that the economy has been growing uncontrollably fast, that the boom is generating extra revenues, and that they are thus a reminder of how far we have to go in slowing the economy down.

But there is another interpretation. The economy has somehow delivered tax rises to the Chancellor. That we have had taxation by stealth - that for any given level of economic activity, Mr Brown has been the lucky recipient of more money than he might reasonably have expected. Maybe it's down to self-assessment? Or the nature of our spending habits (possibly towards more VAT-able goods, away from zero-rated ones, for example). Whatever it is, it maybe that the revenues are like a genuine tax rise. In this case, what has happened since last July, is an eight billion pound unanticipated tightening of fiscal policy. A tightening of that magnitude would slow the momentum of economic growth down; and do the work in the year coming of several interest rates rises.

Of course, the projection for the PSBR next year was not nearly as improved as the projection for the year just gone. That may unnerve us on any interpretation of this year. And of course, some of the eight billion improvement this year is a spending undershoot, which the Chancellor has chosen to add to spending next year. So, one might believe that the eight billion tightening this year has simply brought forward a tightening that would have occurred next year anyway, rather than giving us an overall tightening of much significance. But nevertheless, it has occurred earlier than it otherwise would have, and it thus has more effect in slowing the economy down in the coming year than one might have known.

Now I'm not sure which interpretation is the right one. Are the buoyant revenues a sign of overheating? Or are they a sign of an unanticipated backdoor tax increase? The City though, simply doesn't appear to have thought about it.

You have to feel sorry for Mr Brown - but he can console himself with the very positive headlines he garnered for his micro-economic package.

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