The government today prescribed for the ailing British economy a bittersweet pill of tax increases, spending cuts and a 2 percent reduction in interest rates that will hurt the average Briton but ease a little of a the pain suffered by British industry.
While designed to salvage Prime Minister Margaret Thatcher's so far unsuccessful monetarist strategy, the package of economic measures announced in Parliament is filled with tactical changes dictated by gloomy economic reality.
The spending cuts are smaller than Thatcher wanted to reduce the government's budget deficit. They also necessitated a reduction in planned defense expenditures, which makes it impossible for her to fully honor her NATO alliance commitment for increased defense outlays either this year or next.
The tax increases conflict with Thatcher's past promises to cut taxes. Furthermore, a break in the link of civil servant and old-age pensions to the cost of living index appears to violate another Thatcher pledge to keep pensions from falling behind inflation.
The necessity of easing the squeeze on private industry, hard hit by Britain's worst recession in a half century, forced Thatcher to allow the minimum lending rate to be cut from 16 to 14 percent. This will make bank loans cheaper for desperate businesses and help bring down the exchange rate of the British pound sterling to make prices of British exports more competitive.
The interest rate, which had been kept at record high levels to try to discourage bank lending and reduce the growth of the money supply, was cut today even though monetary growth has continued to soar above the government's targets. Thatcher's chancellor of the Exchequer, Sir Geoffrey Howe, said new techniques would be tried to bring the money supply under the government's control.
The nearly $2.5 billion worth of cuts in planned government spending is only about half the savings sought by Thatcher's monetarist treasury ministers to reduce the budget deficit. But they were restrained by other Cabinet ministers concerned about the growing unpopularity of the government's already harsh policies.
Even the smaller spending cuts, which will leave next year's budget 1 percent lower than this year's according to Howe, will force further politically risky reductions in housing, education, social welfare programs and local government services.
To make up for the government's inability to trim next year's spending even more, Howe announced nearly $5 billion in tax increases and hinted that more could follow next spring. The payroll tax for the National Health Service and unemployment insurance is being increased, and excise taxes on alcohol, tobacco and possibly other items are expected to be raised in the spring.
Local governments also are expected to raise property taxes sharply to offset cuts in their support from the national government. Rents also will be raised by nearly 30 percent for the one British family in three that lives in government-owned housing.
The opposition Labor Party's former chancellor of the Exchequer, Denis Healey, immediately charged that the spending cuts inflict "further brutal blows on the welfare state" and that the tax increases represent a "massive breach" of Thatcher's promise to substantially reduce taxes as prime minister.
Healey told Howe in Parliament that the new economic package, known to be a compromise of conflicting views within Thatcher's Cabinet, "confirmed that the foundations of your economic policy are in ruins."
A half-billion -dollar cut in planned defense spending next year will make it impossible for Britain to honor its NATO commitment to make an increase of 3 percent above inflation. Howe estimated that defense spending would rise by 2.5 percent above inflation this year and next, depending on the inflation rate.
A change in the way government employe and other old-age pensions will be calculated next year also appears to conflict with previous pledges by Thatcher that they would not fall behind the cost of living. Instead of following the same policy as in the past, when they were increased by the same percentage as the inflation rate, they will go up by one percentage point less.
Howe insisted, however, that "our pledge to pensions is being kept" and the "real value of their pensions is being maintained." Next year's one percentage point cut, he said, will merely make up for the fact that this year's increase of 16.5 percent is a percentage point higher than the current falling inflation rate of 15.4 percent.
But some government ministers reportedly want to break permanently the link between pensions and the cost of living index. The Thatcher governemnt has already broken the link for unemployment benefits.