TAX REVENUES BOOST U.K. BUDGET OPTIONS
A mix of electoral boldness and fiscal
caution is expected from Chancellor of the Exchequer Nigel
Lawson next week when he unveils his budget for fiscal 1987/88.
    Exceptionally robust tax revenues have given Lawson very
favourable budget options with which to please voters, industry
and financial markets alike.
    The budget will Lawson's fourth, and probably the last from
the Conservative government before the next general election,
political analysts say.
    Analysts said the major budget question is how Lawson will
balance expected tax cuts with lower public borrowing, and
allow for fresh falls in U.K. Interest rates.
    They said a boost given to the economy by consumer spending
has helped reduce the Public Sector Borrowing Requirement
(PSBR) for financial 1986/87 from an originally targetted 7.1
billion stg, despite big rises in government spending.
    Economists say Lawson may have up to five billion stg to
split between income tax cuts and other electoral "sweeteners,"
higher spending and a drop in borrowing, while still meeting
his earlier 1987/88 PSBR target of 7.0 billion stg.
    The decision facing Lawson is how best to use that
so-called "fiscal adjustement" to maximise the government's
all-round popularity ahead of the next general election.
    Economist Ian Harwood of Warburg Securities said Lawson's
budget must strike a balance between tax cuts aimed at home
consumption and lower public borrowing for attracting support
from overseas investors.
    Peter Fellner of James Capel and Co said "a budget which
concentrates on tax cuts for the consumer will be a budget for
an early election."
    Prime Minister Margaret Thatcher must call a poll before
June, 1988. But anticipation of a summer or autumn 1987 ballot
has risen as the opposition Labour Party has slipped in voter
surveys. Forecasts that the economy may deteriorate later this
year add to arguments for an early poll, analysts say.
    The Conservatives have pledged to cut the basic rate of
taxation in the U.K. From the current 29 pct level to 25 pct.
    While confirming that aim, Prime Minister Margaret Thatcher
last month seemed to dash speculation that that would happen in
the near future. She said in a television interview that it
would happen "Eventually. But I think it will be eventually."
    Most market analysts now expect a two-pence reduction in
the basic rate of taxation and a lowering in of the top rate of
income tax from 60 pct.
    A one billion stg cut in the 1987/88 PSBR - to six billion
stg - is considered the minimum needed for reassuring financial
markets, they add.
    The Treasury's inflow of tax receipts has far surpassed
that previously envisaged, economists say. Lawson as recently
as December 17 said that "I very much doubt whether there will
be much scope for reductions in taxation in next year's budget."
    The Conservative government is eager to get the basic rate
of tax down to 25 pct as soon as possible, since every pound
off the tax base would make the opposition Labour Party's
spending plans look more painful to the electorate, analysts
say.
    The direct revenue effect of a one penny change in the
basic rate of income tax would be about 1.1 billion stg in
1987/88 and 1.45 billion stg in 1988/89, Treasury figures show.
    Lawson's budget speech to Parliament on Tuesday starts at
1530 GMT, and is sure to echo the government's distinct tone of
optimism, analysts say.
     The tax measures which Lawson is expected to announce will
be based firmly on a positive assessment of past economic
achievements and confidence for the future, they add.
    But even if he does cut his planned PSBR for 1987/88 by
between one and 1.5 billion stg, as most economists predict,
Lawson is still likely to find himself announcing a higher PSBR
than the outturn for this financial year.^M
    That could leave him with a presentation problem,
economists say.
    A lower PSBR would raise financial confidence by reassuring
markets that the borrowing burden imposed by the government
would stay low even if certain key aspects of the budget's
arithmetic seem over-optimistic, economists say
    Lawson is slated to reaffirm the government's goals, as set
out in its Medium Term Financial Strategy (MTFS), of reducing
inflation and raising economic growth.
    Regarding monetary targets, some analysts expect him to
drop the wayward broad money aggregate, sterling M-3, while
retaining the tamer M0 narrow measure. Few foresee any other
monetary aggregate being chosen by Lawson for formal targeting.
    Analysts were surprised this week when the government
sanctioned a half percentage point cut in interest rates, in an
attempt to cool down sterling and the gilts market. Analysts
had expected the authorities to wait until after the budget.
    Further declines in bank base lending rates are anticipated
after the budget. Many analysts foresee them falling by as much
as a full percentage point from the current 10.5 pct level.
    The main electoral attraction of reducing interest rates is
to cut mortgage borrowing costs, and thus reduce inflation,
analysts say. Each one percentage point cut in the mortgage
rate reduces retail prices by 0.4 pct, government figures show.
 REUTER
