Memorandum submitted by Mr David Walton,
Following the UK government's Spending Review,
total UK public spending in the three years from 2002-03 remains
as set out in the Budget.
Spending on front-line services is set to rise
by a hefty 5.6 per cent a year in real terms during this Parliament,
helped by low levels of spending on both unemployment benefits
and debt interest. Discretionary spending will rise almost three
times a year faster than achieved during Labour's first term and
four times a year faster than when the Conservatives were in office.
Despite these rapid increases in spending, the
government's fiscal rules should continue to be met comfortably.
The government's projections are based on reasonably central (though
not cautious) economic assumptions.
At a time when there is continued uncertainty
about world economic prospects, fiscal policy will continue to
support UK GDP growth this year and next.
THE UK CHANCELLOR'S
The UK Chancellor, Gordon Brown, has set out
the government's detailed spending plans for the three year period
from 2003-04 to 2005-06. As expected, there were no revisions
to the overall spending totals set out in the Budget on 17 April
2002. These imply that in the three years covered by the Spending
Total government spending (known
as total managed expenditure or TME) will rise 4.3 per cent a
Current spending will rise 3.8 per
cent a year.
Public investment will rise 15.7
per cent a year to 2 per cent of GDP in 2005-06, up from 0.9 per
cent of GDP in 2001-02 (the outturn for 2001-02 has been revised
down by 0.3 per cent of GDP from the estimate in the Budget).
Apart from the current/capital split, public
spending is divided into two main components for planning purposesdepartmental
expenditure limits (DELs) and annually managed expenditure (AME).
In the Spending Review, departments were allocated fixed three-year
DELs. The remainder of spending which cannot be controlled within
fixed departmental budgetsusually because it is demand-led
(eg social security payments and debt interest payments)is
controlled within AME and reviewed annually. In the three years
covered by the Spending Review:
AME spending is projected to grow
by 3 per cent a year in real terms.
DELs are planned to grow by 5.2 per
cent a year in real terms. Within DELs, spending on the National
Health Service will rise by 7.3 per cent a yer in real terms (as
previously announced in the Budget). The other big winners were
education and transport with annual real rises of 5.7 per cent
and 8.4 per cent respecively.
Table 1 compares public spending under Labour
with the Conservatives. During Labour's first term, TME grew by
just 1.1 per cent a year in real termsin line with public
spending growth during the Thatcher years and well below that
achieved during the Major government (2.6 per cent a year). Labour's
plans for its second term are much more ambitious. TME is planned
to rise by 4.3 per cent a year over the five years of this Parliament.
For the whole of Labour's period of office since May 1997, TME
is planned to grow by 2.9 per cent a year compared with 1.6 per
cent a year under the previous 18 years of Conservative rule (see
PUBLIC SPENDING COMPARISONS
|Average annual % change|
|Total Managed Expenditure||Discretionary Total Managed Expenditure*
|1979-80 to 1996-97||1.6
|Thatcher (1979-80 to 1990-91)||1.1
|Major (1991-92 to 1996-97)||2.6
|1997-98 to 2005-06||2.9
|Blair-1 (1997-98 to 2000-01)||1.1
|Blair-2 (2001-02 to 2005-06)||4.3
*Excluding cyclical social security spending and debt interest
payments. Partially estimated by Goldman Sachs.
The growth in discretionary public spending is even
more striking, stripping out cyclical social security spending
(primarily unemployment benefits) and debt interest payments (see
Graph 2). A combination of lower unemployment, lower interest
rates and a sharp fall in the share of public debt in GDP means
that much more of Labour's spending is on front line services
compared with previous governments. Discretionary TME is set to
rise by 4 per cent a year in real terms between 1996-97 and 2005-06almost
three times as fast as the 1.4 per cent a year achieved by the
Conservatives. During the current Parliament, spending is planned
to increase at an annual rate of 5.6 per cent a year. This is
almost three times a year faster than achieved during Labour's
first term and four times a year faster than that achieved when
the Conservatives were in office.
Despite these rapid increases in spending, the government's
fiscal rules should continue to be met comfortably. On Goldman
Sachs' economic forecasts, which are very similar to the Treasury's,
the current budget is in surplus by around Ø per cent of
GDP in 2006-07 while the ratio of net public sector debt to DPG
is around 30 per cent (see Graph 3).
Of course, the public finances could be blown off course
if the economy performs less well than the Treasury expects or
if underlying tax revenues fail to grow at least as fast as nominal
GDP growth (note that the outturn for tax receipts in 2001-02
was £0.3 billion higher than estimated in the Budget). But
it is reasonable to assume that the UK economy will grow by around
a trend rate of 2Ö per cent in 2002-03 (GDP growth appears
to have bounced back very strongly in 2002Q2 after two quarters
of near stagnation) and in subsequent years. This assumption would
only be too optimistic if the UK were already operating above
potential which does not seem likely given the very low level
of inflation (RPIX of 1.5 per cent in June 2002).
At a time when there is continued uncertainty about world
economic prospects, fiscal policy will continue to support UK
GDP growth this year and next. After easing by 1.3 per cent of
GDP in 2001-02, we estimate that the fiscal stance will ease by
a further 0.9 per cent of GDP in 2002-03 and 0.4 per cent of GDP
in 2003-04 (see Graph 4).