I mentioned a moment ago the need to keep public sector borrowing low.
The final outturn for the public sector borrowing requirement last year, 1985–86, was just under £6 billion, equivalent to 1½ per cent. of GDP, the lowest level since 1970–71. In my Budget last year, faced with a massive loss of what now looks to be almost £7 billion of North sea oil revenue, I none the less decided to hold the PSBR for this year, 1986–87, to £7 billion, or 1¾ per cent. of GDP.
In the event, this year's PSBR looks like turning out at only £4 billion, or 1 per cent. of GDP — the second successive year of significant undershoot. This successful outcome is chiefly attributable to the remarkable buoyancy of non-oil tax revenues in general and of the corporation tax paid by an increasingly profitable business sector in particular.
Looking ahead, there is still a degree of uncertainty surrounding oil prices, and I have therefore stuck to the assumption I made last year that the North sea oil price will average $15 a barrel. But is clear that the increased flow of non-oil tax revenues, coupled with the prospective further growth of the economy in excess of the growth of public expenditure, puts the public finances in a very strong position. I intend to keep it that way.
Last year's MTFS indicated a PSBR for 1987–88 of £7 billion, or 1¾ per cent. of GDP; and, as the House will recall, I gave an assurance at the time of the autumn statement, when I announced a £4¾ billion increase in planned public expenditure in 1987–88, that on no account would I exceed that figure.
Indeed, I believe it is right to go below it. Since its inception in 1980, the MTFS has indicated a steadily declining path for the PSBR expressed as a percentage of GDP. We have now reached what I judge to he its appropriate destination — a PSBR of 1 per cent. of GDP. My aim will be to keep it there over the years ahead. This will maintain a degree of fiscal prudence that, until this year, had been achieved on only two occasions since 1950.
Accordingly, I have decided to provide for a PSBR in 1987–88 of £4 billion.
Inevitably, this greatly diminishes the scope I have this year for reducing the burden of taxation, which of course remains a major objective of Government policy. But I am sure it is right to err on the side of prudence and caution, and to build a still firmer base for the future. That is the principle on which both I and my predecessor have consistently conducted economic policy these past eight years, and I see no reason to depart from it now.
Meanwhile, I would make one further observation, of a different nature. Economic arguments are seldom concluded, one way or another. This is chiefly because it is unusual for economic policies to be held in place long enough to provide sufficient evidence. But the 1980s have been different; and, as a result, one critically important economic argument has now been concluded, finally and decisively.
Throughout our period of office, our critics have consistently maintained not only that a fiscal stimulus would produce real economic growth but that without an expansionary fiscal policy sustained growth was impossible. They were wrong, and have been proved wrong. The British economy is now embarking on its seventh successive year of steady growth, at an average rate of getting on for 3 per cent. a year. And during that time the PSBR, even if privatisation proceeds are added back, has been deliberately and steadily reduced from a shade under 6 per cent. of GDP to a little over 2 per cent. Indeed, had I or my predecessor at any time heeded the advice of our so-called expansionist critics, the British economy would never have been in the unprecedentedly favourable position it is in today.