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EXPENDIT SURVEY
1989
6. The Cabinet considered a memorandum by the Chancellor of the Exchequer (C(89)9) on economic prospects and a memorandum by the Chief Secretary, Treasury, (C(89)8) on the 1989 Public Expenditure Survey.
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THE CHANCELLOR OF THE EXCHEQUER said that economic prospects had not changed fundamentally since the Budget, when the Cabinet concluded that the defeat of inflation must be the Government's top priority. Such change as there had been served to reinforce that conclusion. Demand was now expected to be a little stronger than forecast at Budget time, although the increase was not in consumption but in investment, where it had led to pressure in the construction sector in particular. result of the higher demand, inflation was also slightly higher than forecast at the time of the Budget, with the Retail Price Index now at 8.3 per cent or 6 per cent if the effect of increase mortgage interest rates was removed from the calculation. The growth in demand and inflation also meant that import growth and interest rates were rather higher than forecast at Bet time. The present level of inflation was however at or very near the peak, and he expected it to decline gradually in the second half of the year. The decline would be gradual: by the end of the year the RPI might still be at 6 3/4 per cent, compared the 5 1/2 per cent forecast at the time
of the Budget.
Against this background, it was essential for political and economic reasons to retain tight control of public expenditure. Higher spending would increase the pressure of demand still further, especially in the construction sector, and might force a rise in taxation. Above all the Government must maintain its reputation for good economic management, and especially for keeping inflation under control. It was wrong to think that the current Budget surplus provided easy source of finance for higher spending. Part of it was rely cyclical and it was likely to be rather lower in 1989-90 than he had forecast in the Budget. The surplus had also reduced debt interest payments, and the growth of programme expenditure in existing plans was already faster than the projected growth of the economy. It was therefore essential to accept the recommendations in the Chief Secretary's paper.
THE CHIEF SECRETARY, TREASURY said that the 1989 Survey was likely to be exceptionally difficult. Decisions already made had committed an extra £4 billion of spending next year, and had more than exhausted the scope for drawing down the Reserve. The substantial savings on demand-led programmes which had helped the outcome of last year's Survey would not be available on anything like the same scale this year. The use planning total would make presentation more difficult and would make it all the more important to keep a close eye on gere Government expenditure. The more general background also wa
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