The Thatcher government proposed a budget today that went against its winning campaign promises to lower taxes and against the supply-side economic theory now in favor in Washington.
In a measure of relief for hard-pressed businesses, the government cut the minimum interest rate from 14 to 12 percent to makes loans and mortgages cheaper and the price of British exports more competitive in world markets. It also proposed a package of tax breaks, loan guarantees and other incentives for small businesses, plus minor tax adjustments for the rest of industry.
But to compensate for this and to hold down a growing budget deficit that threatened Prime Minister Margaret Thatcher's strategy for squeezing down inflation, her chancellor of the Exchequer, Sir Geoffrey Howe, announced surprisingly steep tax increases for individual Britons.
Excise taxes on alcohol, tobacco, gasoline and automobiles were immediately raised by as much as 30 percent, pushing up the price of a pack of cigarettes to nearly $2, a bottle of whisky to over $13 and a gallon of gasoline to nearly $3.50. The income tax burden on the average family was effectively increased because Howe refused to follow past practice of adjusting tax brackets for inflation.
The changes were attacked by opposition politicians and labor leaders as likely to further deflate the already limp British economy and push unemployment even higher. The government's own accompanying economic statement predicted another sharp drop in industrial output this year and a continuing rise in the unemployment rate, which is already over 10 percent.
Opposition Labor leader Michael Foot called the Thatcher budget "a catastrophe of the first order for the British economy and the British people." He said the measures to help industry were "very little compared with the massive and monstrous deflation of the economy which this budget proposes."
Industry leaders also expressed disappointment that the extra burden on individual taxpayers was not offset by bigger benefits for businesses and that the reduction in the minimum interest rate was not larger.
Even Britain's most conservative business group, the Institute of Directors, was not entirely pleased. Its chairman, Sir William Mather, welcomed the government's refusal to succumb to "the temptation of spending its way out of recession" but criticized the "back door" increase in income tax as "no way to restore personal incentives."
Today's cut in the minimum interest rate brought it down to where it was before Thatcher's government raised it to a record 17 percent in 1979 to try to discourage borrowing and restrict the growth of the money supply. But the high interest rate, along with Britain's North Sea oil income, pushed the exchange value of the pound sterling so high that prices of British exports soared.
Anticipation of today's reduction of Britain's minimum interest rate to well below those in the United States and West Germany had already made the pound sterling less attractive to speculators in present weeks. Its exchange value had fallen from over $2.40 to around $2.20. But it is not expected by analysts to fall any further, and may rise somewhat again, because today's interest rate reduction was not larger.
The Confederation of British Industries, the Trade Unions Congress, the major opposition parties in Parliament and some influential back-benchers in Thatcher's own Conservative Party had all urged the government to start reflating the economy by spending more money on public works, including roads, railroads, waterworks, sewers, gas pipelines and nuclear energy. Industry leaders and Conservative back-benchers argued that this could be done while cutting spending on government bureaucracy so that Thatcher's overall strategy would not have to be abandoned.
But Howe made clear today Thatcher's belief that this is not the time to make such a major change in policy. "To change course now," he said in Parliament, "would be fatal to the whole counterinflation strategy."
He said the budget was designed to protect that strategy, under which the inflation rate has fallen from a high of 22 percent last year to 13 percent today. It is expected by many economic analysts to drop below 10 percent by the end of the year.
Howe reaffirmed the Thatcher government's determination to reduce public spending, in party by holding down government employes' pay raises despite selective disruptive strikes begun by civil servants. He admitted the government has so far failed to hold down spending and borrowing or the growth of the money supply as it had intended.
The recession, made worse by Thatcher's harsh economic policies, has reduced government revenue from company taxes, while increasing its spending on unemployment and welfare benefits for the rapidly growing number of jobless. All this has increased budget deficits and forced the government, along with cash-starved businesses, to borrow more money, hampering attempts to slow the growth of the money supply.