Britain Will Raise Fuel Taxes To Cut High Budget Deficit

BRITAIN's chancellor of the exchequer Norman Lamont has taken a leaf out of President Clinton's book by calling on Britons to accept financial sacrifices in order to curb high levels of public debt and encourage stable long-term growth.

But government supporters say the budget released Tuesday may prove politically dangerous for the ruling Conservatives by adding to the tax burden of middle-income wage earners.

The budget was a two-phase affair. Mr. Lamont promised that in the next few months nothing would be done to damage the fragile economic recovery that analysts say they are beginning to detect. That was the good news for taxpayers.

The bad news was that starting in April 1994, the government will impose a series of taxation measures, including for the first time a tax on domestic fuel and power and a rise in national insurance payments by employees and the self-employed.

The budget was quickly attacked. John Smith, the Labour party leader, said the imposition of value-added tax (VAT) on domestic fuel, starting at 8 percent next year and rising to 17.5 percent 12 months later, was a "cynical betrayal" of election pledges made last April.

Alan Beith, spokesman for the Liberal Democrats, forecast a "sustained period of pain" for middle-income earners.

Lamont, who was trying to grapple with a recession that has wiped out many manufacturing companies and boosted unemployment to 3 million over two years, surprised London's financial district with his estimate that public-sector borrowing would rise next year to $72.4 billion, equal to 8 percent of gross domestic product.

Reactions among financial analysts to the $72.4 billion forecast ranged from "surprising" to "horrendous."

Lamont's new tax policies are designed to deflate the ballooning deficit by raising $24.6 billion in extra taxes over the two years beginning in April 1994.

But analysts said his two-phase strategy - marking time for the next few months, then imposing a progressively tough tax regime - was something of a gamble.

Gavyn Davies, chief economist at Goldman Sachs and one of seven government-appointed "wise men" who advised Lamont in the run-up to the budget, said the strategy was necessary but risky.

"The government has done the right thing by trying, for the time being, to avoid measures that might snuff out economic recovery, but it all depends on whether that recovery has enough momentum of its own," Mr. Davies said. "If it hasn't, there could be trouble ahead."

Ruth Lea, London-based chief economist at Mitsubishi Bank, said it might be necessary in the autumn to take further "stern measures" to curb government spending. She agreed with Lamont that annual borrowing of $72.4 billion was unacceptable, and noted that the chancellor in his budget speech had left the door open for even sharper tax measures than the ones he had already announced.

Lamont's budget is the last to be unveiled in the spring. In future, the government's annual revenue-raising plans will be announced in the autumn, along with its spending intentions. Miss Lea said the combined statement in six months' time might contain "further unwelcome surprises" if the "green shoots of recovery" had not been confirmed by then.

As a political exercise, the budget promises to create problems for Prime Minister John Major who is planning for a general election in 1996.

Lamont's strategy of "building a wedge of rising revenue" seems likely to impact most heavily on middle-income earners. In addition to having to pay more in energy bills and national insurance, they face cuts in tax relief on home loans and have been offered no increases in personal tax allowances.

"I'm with Norman on the need for these measures," a leading Conservative backbencher said, "but we can't escape the fact that he will be hurting the very people whose support we'll need if we want to be reelected."

Lamont ordered a gasoline price increase of 22 cents a gallon and raised annual excise duty on cars by $21.70.

The backbencher said that Lamont, whose performance as chancellor has been under criticism since last September's forced devaluation of the currency, had "probably done himself some personal good" with the budget.

The Labour opposition is determined to focus on the policy of imposing a VAT on domestic fuel bills. David Blunkett, shadow health secretary, said the tax would "endanger the lives of many elderly people." Britain is the only member of the European Community that does not tax domestic electricity and gas usage, and in the 1992 general election Mr. Major and Lamont said they saw no need for such a measure. The chancellor defended VAT on domestic energy as an element in government plans to reduce global wa rming.

Mr. Smith and his colleagues bitterly attacked the government's policy somersault, but Lamont said the elderly could expect special government help with their fuel bills.