Britain's Head of Finances Resists Recent Pressure to Reduce Taxes

Conservative Party fears for its future in light of chancellor of the exchequer's more cautious economic stance

KENNETH CLARKE, Britain's chancellor of the exchequer for the past year, is quickly learning that getting the balance right between economic necessity and political popularity is a delicate art.

Results of the June 9 European Parliament elections, in which the ruling Conservatives saw their seat tally cut from 32 to 18, put immediate pressure on the man in charge of Britain's finances to cut taxes and, thus, curry favor with voters.

A broad swath of government-supporting members of the British Parliament, worried about their prospects at the next general election, urged Mr. Clarke to cancel a planned domestic fuel tax and to find other ways of reducing the tax bill of those who withheld their support from the Conservatives in the European vote.

Clarke answered his critics by bluntly telling them to be patient. In a widely reported speech to bankers on June 15, he ruled out early tax cuts and vowed that he would not preside over another ``boom and bust'' in British economic fortunes.

Clarke's steadfastness won him few friends among nervous Conservative backbenchers, but Eddie George, governor of the Bank of England, told the same audience that the chancellor's cautious approach was correct.

Mr. George, who is working closely with Clarke on financial policy, warned that a more likely future scenario than tax cuts was a rise in interest rates. This might be necessary to keep Britain's still-fragile economic recovery on course.

To drive home his cautious message, Clarke, whom many see as a possible future prime minister, contradicted a suggestion by Sir Norman Fowler, chairman of the Conservative Party, that tax cuts could be expected in the chancellor's next two budgets.

There can be little doubt that a readiness to ease taxes would help Prime Minister John Major and his government recover popularity. The outcome on June 9 was the worst performance by the Conservatives in a nationwide poll this century.

Mr. Major and senior government ministers have admitted that Clarke's determination to curb the national deficit through a mix of tough taxes and tight government spending persuaded many who normally support the Conservatives either to abstain or vote for opposition parties.

The imposition of a 17.5 percent tax on domestic light and heat is especially unpopular among a package of measures that have hiked the average individual tax bill by around 500 ($768) a year.

The opposition Labour Party, which ended up with 62 Euro-seats, relied heavily on the tax argument in its efforts to swing voters to its side. It is hoping that, in the next two years, it can continue to attack the government's revenue policies and, thus, pave the way for a victory in the general election, expected in 1996 or 1997.

Official figures tend to justify Clarke's refusal to authorize an early softening of the current tough policies. Unemployment is falling steadily, and tax increases authorized by Clarke late last year appear to have had only marginal impact on consumer spending.

The danger that Clarke and George see is that a softening of tax and spending policies now would fuel inflation. Currently, inflation is running at about 2.5 percent. It is forecast to be no higher than 3.2 percent a year from now.

If inflation broke through the 4 percent barrier, George indicates that interest rates would have to rise. This would put brakes on the recovery. In his June 15 speech, Clarke declared: ``Today's and tomorrow's politicians have no choice but to pursue the path of low inflation.''

A new factor in the British economic and financial debate is Clarke's decision earlier this year to publish the minutes of his regular monthly meetings with George. Analysts say this sets limits as to how far the chancellor could go in pursuing politically popular policies with which the bank governor disagreed.

Peter Riddell, a leading political commentator, argues that Clarke or any other chancellor will, in the future, have to take careful account of potential Bank of England criticism before deciding on tax policy.

In his longer-term attempts to balance economic need against political advantage, Clarke may find he has an ally in the economy itself. Unofficial analysts suggest that economic growth is likely to be better and faster than the 2.5 percent the chancellor is forecasting.

Morgan Stanley, the American investment bank, suggests that growth this year will be 3 percent, rising to nearly 4 percent in the next two years. If this proves to be correct, Clarke may end up being able to authorize modest tax cuts in the run-up to the next election.