1994 United Kingdom budget

The 1994 budget took place at a difficult time for the Conservative Party, which had removed the Party Whip from eight of its backbench MPs who, during the previous week, had voted against legislation to increase subsidies to the European Union. This meant the party had no overall majority in the House of Commons at the time of the budget. The Conservative Government had also introduced Value Added Tax (VAT) on domestic fuel the previous year, which was unpopular with the public. VAT on fuel of 8% had come into force in April 1994, and was scheduled to increase to 17.5% from April 1995.[3][4]

Titled A Budget for Jobs, Clarke described his 1994 statement as having three main priorities: To keep the economy on track to sustain growth, to use the recovery to create more jobs, and to strengthen the economy in the longer term.[5] At its centre was a £24bn[lower-alpha 1] programme of tax cuts which was to be achieved over three years, and would be the biggest programme of tax cuts since 1984.[3]

Following the recession of the early 1990s, economic recovery had been under way "at a modest pace" for two and a half years, and was providing the UK with the strongest recovery in Europe. Clarke expected economic growth to be at 4% for 1994–95, and 3% for 1995–96. Inflation was described as being well below the European average, and at its lowest since the 1960s. It was expected to be 2% in 1995. Government plans were announced to set interest rates to keep inflation between 1% and 4%. UK exports were expected to grow by 8% during 1994–95, while investment in plant and machinery would grow by 12%. Consumer demand was much lower, and was forecast to grow by 2–3% over the year. Clarke reported that UK unemployment had fallen by 450,000 since December 1992, with the UK the only country in Europe where unemployment had fallen.[5]

During 1993–94 the government had reduced its planned public expenditure by more than had been forecast, and it was now predicted to be £15bn[lower-alpha 2] lower over a three-year period than originally estimated. Expenditure would be reduced by £28bn[lower-alpha 3] over 1994–95. The Balance of Payment was expected to be reduced by £6bn[lower-alpha 4] for 1994–95, while the public sector borrowing requirement (PSBR) had fallen from £45bn[lower-alpha 5] in 1993–94 to £34bn[lower-alpha 6] in 1994–95. Going forward, Clarke had reduced previously forecast amounts the government had expected to borrow from £30bn[lower-alpha 7] to £21bn[lower-alpha 8] in 1995–96, from £21bn to £13bn[lower-alpha 9] in 1996–97, and from £12bn[lower-alpha 10] to £5bn in 1997–98. Borrowing was also forecast to be equal to government net capital expenditure by 1996–97, with plans to eliminate government borrowing by the end of the decade.[5]

The private finance initiative (PFI) was growing rapidly, with the £370m[lower-alpha 11] invested in public transport and £100m[lower-alpha 12] of private investment in the National Health Service both cited as examples, with more PFI investment to follow. A third of finance for universities was also coming from the private sector by November 1994. It was forecast that £5bn[lower-alpha 13] of capital investment from PFI contracts would be announced during 1995, with the first four private finance transport schemes to shortly go out for tender.[5] Savings in the cost of central government were also forecast, and was expected to be reduced by 10% over the four years to 1997–98, while the number of civil servants would fall to below 500,000 over the same period, their lowest since World War II. Local authority cost were also undergoing reduction, and would be 2.2% in 1995–96.[5]

The chancellor made no major changes to taxation. The lower, middle and upper tax bands remained at their pre-budget levels, although Clarke did increase the 20p rate to £3,200, declaring the "one in five of all taxpayers will now only pay tax at the lowest rate". A full National Insurance rebate of up to twelve months was announced for employers taking on a new employee who had been unemployed for two years or longer, effective from April 1996, lower rate National Insurance contributions would fall by 0.6%, cutting the cost of providing lower paid jobs by £230m[lower-alpha 14] in 1995–96. After renewing his commitment to increasing VAT on fuel from 8% to 15%, he acknowledged this would cause difficulty for some and announced a package of help worth £10bn[lower-alpha 15] for pensioners, which would include grants for insulating homes and an increase in cold weather payments. The budget included no plans for an increase in duty on alcohol, largely due to the effect the Channel Tunnel was having on the UK drinks industry, but an increase was announced for tobacco, with an increase of 10p on a packet of 20 cigarettes.[1][3]

In his response to the statement, Tony Blair, leader of the Labour Party and leader of the Opposition, said the budget would become known as the "VAT on fuel budget", and, with reference a planned reduction in mortgage relief to 15% and a reduction in the married couples' tax allowance from April 1995, raised the issue of "other tax rises" that he claimed had not been mentioned in the budget.[3]

The City of London dismissed the budget as a "jam tomorrow" budget.[3]

Clarke argued the revenue that would be raised from increasing VAT on fuel was needed in order for his budget to be implemented and that he would have to cut public spending without it, but many of his party's own MPs feared introducing it could cost the Conservatives votes at the next general election. The legislation to increase VAT on fuel from 8% to 17.5% had its second reading before the House of Commons on 6 December 1994, and was defeated 319–311 in the subsequent vote. In addition to opposition MPs, 15 Conservatives (including the eight suspended MPs) also voted against the proposals, as well as the pro-Conservative Ulster Unionists. Responding to the vote, Clarke told the House, "It is only right that we should listen to the views expressed here. I have therefore decided not to proceed with the second stage of VAT". On 7 December, Jonathan Aitken, the Chief Secretary to the Treasury, confirmed there would be "further reductions in public spending and a raising of taxes in other areas".[4]

Faced with a financial shortfall as a result of the money that would not now be raised from the increase, Clarke made an emergency financial statement to the House in which he outlined measures to plug the gap. This included cancelling some of the proposed £10bn help for pensioners, as well as raising excise duty, with 6p on a packet of 20 cigarettes and 4% on alcohol.[3]

In October 1995, the Labour Party announced they would reduce the amount of VAT on domestic fuel from 8% to 5% if they were to form the next government, and the pledge was included in their manifesto for the 1997 general election. In his budget of 2 July 1997, Chancellor Gordon Brown announced VAT on domestic fuel would be reduced to 5% from 1 September 1997.[6]

A 1997 research paper prepared by the House of Commons Library indicated the 8% VAT rate raised £850m[lower-alpha 22] in 1994–95, and £1.1bn[lower-alpha 23] in 1995–96.[6]