Britain: An official handbook > 1993

BRITAIN 1993: AN OFFICIAL HANDBOOK
Britain intends to resume membership of
the ERM once:
• the turbulence in the foreign exchange
markets is ended;
• further analysis has been undertaken of
developments in capital markets and in
the European and world monetary
system; and
• British and German monetary policies
have been brought more into line and the
wide differential in German and United
States interest rates narrowed.
In assessing the overall stance of monetary
conditions, the Government pays attention to
a range of indicators. Narrow money, as
measured by MO,1 has proved a reliable
indicator. A target range of 0 to 4 per cent
has been set for MO growth in 1992-93.
Fiscal Policy
The role of a tight monetary policy in
reducing inflation is supported by a firm
fiscal policy. In order to enable industry to
take advantage of the opportunities presented
by the lower exchange rate which followed
Britain’s withdrawal from the ERM, the
Government considers it essential to maintain
tight control over public spending and
borrowing. This will help ensure that the
public sector matches private industry’s
efforts to contain wage costs and maintain
improved competitiveness.
Fiscal policy is set according to the
medium-term objective of a balanced budget.
This is consistent with cyclical variations in
government spending and revenues—
‘automatic stabilisers’. The public sector
therefore tends to run a surplus when the
level of economic activity is high and a deficit
when it is low. For 1992-93 the Government
has decided on an increased level of
borrowing, confident that the underlying
position is sound and that the budget will
move back towards balance as the economy
recovers. The Government does not attempt
to ‘fine-tune’ the level of demand through
1 MO is notes and cash in circulation with the public and banks’
holdings of cash and their operational balances at the Bank of
England.
changes in fiscal policy; it believes that the
associated time lags generally mean that such
changes will be destabilising. Frequent
changes in taxation or spending policy may
also produce an adverse supply-side response.
Within the overall policy of a balanced
budget over the medium term, the
Government aims to reduce taxes so as to
leave people with more of their own money.
The basic rate of income tax has been cut
from 33 to 25 per cent, and in the 1992
Budget the Government introduced a new
lower rate of income tax of 20 per cent on
the first ^2,000 of taxable income. The
Government’s objective for public spending is
that over time it will take a declining share of
national income, while value for money is
constantly improved. This has seen the ratio
of general government expenditure, excluding
privatisation proceeds, to GDP fall from 47-5
per cent in 1982-83 to 42 per cent in
1991-92. The forecast level of the Public
Sector Borrowing Requirement, £28,000
million or 4-5 per cent of GDP for the year
to March 1993, can be largely attributed to
the impact of the recession.
Supply-Side Policies
While macroeconomic policy is directed
towards reducing inflation, the Government
has sought to improve the supply response,
and thus the efficiency, of the economy
through microeconomic policies. Action has
been taken to expose more of the economy to
market forces. Direct controls—for example,
on pay, prices, foreign exchange, dividend
payments and commercial credit—have been
abolished and competition in domestic
markets strengthened. Steps have been taken
to reduce regulatory burdens on business.
Labour market reforms have been introduced,
measures implemented to encourage saving
and share ownership, and a substantial
amount of activity has been transferred from
the public to the private sector by
privatisation and contracting work out. In
addition, efforts have been made to improve
value for money in the public sector by, for
example, transferring many of the executive
functions of government to new executive
agencies.
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