The chancellor's tax time-bomb is about to go off. From April, pay packets will reflect the measures announced in last year's two budgets. Higher national insurance contributions, a reduction in mortgage interest tax relief, VAT on domestic fuel and other changes in allowances and duties will reduce average take-home pay by £4.60 per week. These measures will raise an extra £8.4 billion for the Government in 1994/5, equivalent to 1.2% of GDP, and help set the PSBR on a downward trend. The UK government is not alone in having to curb its borrowing this year. In Germany, measures announced in the Solidarity Pact will take more than 1.5% out of the economy. The French government has tempered its original plans but deficit reduction is still expected to weigh on growth. Fiscal retrenchment will continue in Italy and taxes are set to rise in smaller European countries. Across the Continent, says Schroder Economics, this adds up to a net contraction of more than 1% of GDP this year. Taxes and spending cuts in the US will also weigh on growth as Clinton's budget plan takes effect. Japan is the only major industrial country where income tax cuts are expected this year, as the government uses its strong fiscal position to boost economic activity.
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