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NEWS Wednesday, 10 March, 1999, 17:35 GMT
Where's the money coming from?
The UK tax burden 1978-9 to 2002-03
The government has seemingly pulled off the impossible - cutting taxes while maintaining fiscal responsibility during a period of recession.

The chancellor's tax-cutting budget was made possible by the tight control of public spending and a steep increase in taxation in the first two years in office.

Unexpected savings in future public spending plans also released extra money for bigger-than-expected tax cuts.

The government found an extra 18bn in public spending savings over the next three years to fund the tax cuts.

The biggest saving is in social security payments, because of the fall in unemployment over the past two years. Social security spending will be 9bn less than planned at the time of the last budget.

And falling interest rates have reduced the bill for paying the national debt by 4bn over three years.

Overall, the restraint in public spending more than outweighed the fall in tax revenues due to the recession, which is projected to be 8bn.

The net effect was to make an additional 10bn available to the government.

Of that, 6bn is being spent on tax cuts and extra public spending, while 4bn is being used to reduce the national debt.

Tax cuts - and rises

The net effect of the tax cuts is also far less dramatic than the headline figures might suggest.

The most expensive measures, the introduction of a 10p tax rate, and the 1p cut in the basic rate, cost 4.6bn.

But this is nearly balanced by the abolition of mortgage tax relief and the married couples allowance, which will raise 3.4bn.

More than 2bn was raised by increasing taxes on tobacco and petrol, paying for some of the additional changes to National Insurance. More money - nearly another 2bn - will be raised by the carbon tax.

Overall, the public finances will only be 1bn worse off in 1999, 1.4bn worse off in 2000, and 3.5bn worse off by 2001.

And these figures do not take into account the 4bn in pre-announced tax increases this year, including the first stage in the reduction of the married couples allowance and increases in corporate taxation.

The calculations could still go wrong - a deeper recession could boost unemployment and social security spending again.

But at the moment the government is benefitting from a virtuous circle, as the mild recession and rosy outlook for interest rates rebound to help the public sector finances - and the taxpayer.

Links to more NEWS stories are at the foot of the page.


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