THE Chancellor yesterday announced his determination to bring down

dramatically public spending as a share of national income and to turn

the Budget deficit of nearly #50 billion to almost zero by the end of

the century. While raising taxes, Mr Kenneth Clarke said that the key to

secure public finances was the control of spending.

Public spending is now planned to fall from 45% of the national income

this year to 42.5% by 1996-97 and continue on a downward path

thereafter.

The spending ceilings planned last March for the next three years have

been cut back and real growth -- that is taking into account inflation

-- is planned to be less than 0.25% a year over the next three years.

The decison to cut back on spending means that the Government will

have to borrow less and the Chancellor has taken up more of the gap

between spending and revenue by increasing taxes. Over the next three

years, spending restraint is delivering as much as the new taxes.

Public sector employees face years of pay stringency with increases

having to be funded by improved efficiency.

Policy changes on social security will deliver gross savings of nearly

#1 billion in 1994-95, rising to #2.5 billion by 1996-97. Asking big

employers to bear the whole cost of sick pay and action to cut benefit

fraud, to be announced in more detail today, will make large

contribuitions to this.

The housing and roads programmes will see significant savings although

lower construction prices mean that output will be cut less. Local

authorities will also have to make pay and efficiency savings if

services are to avoid cuts.

The priority spending areas are the VAT on fuel compensation package

to pensioners and low-income groups, additional resources for the NHS --

#390m next year and #510m in 1995-96, and for education -- #390m and

#580m.

Six new privately financed prisons will be added to the Home Office

budget and spending on basic science and technology is to be protected.

There is to be a new childcare allowance. Measures which will have a

bigger impact in the longer term announced yesterday include the reform

of invalidity benefit, the extension of the student loan scheme, and a

new state pension age for women.

The Treasury made clear yesterday that more fundamental spending

reviews were in the pipeline. The next batch will cover employment and

transport programmes, the legal departments, the Trade and Industry

Department, urban spending, the Inland Revenue, Customs and Excise, and

the Treasury itself.