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  1. Long reads
27 March 2006

Bold visions, but where’s the cash?

By Donald Hirsch

Gordon Brown’s worst nightmare is to be seen as a Chancellor who has run out of steam. In his tenth Budget, his ambitions for public spending and investment are as lofty as ever. His most far-reaching new target is to bring spending per pupil at state schools up to the level of private education. How are such bold visions still possible at a time when, according to any analyst you care to talk to, he has in effect run out of new money?

In practice, the spending spree of the past six years is all but over. The coming financial year will be the last in which total public spending grows faster than GDP. As spending levels off, there will be plenty of unfinished business that cannot be completed without further resources, whatever the rhetoric about efficiency savings. The new target for education spending is described as a “long-term aim”, which would presumably be achieved only when budgets allow.

The lack of new resources will put at risk some of Brown’s most ambitious existing targets. The ending of child poverty by 2020 requires not just a continuation but a stepping up of his generosity to date. Figures earlier this month showed that he had narrowly missed a first milestone of reducing child poverty by a quarter, despite the billions poured into tax credits. More importantly, on present policies he will fall well short of the next target: halving child poverty by 2010. This is because it has become progressively harder to get workless families into jobs: most of those remaining out of work have a child under five or an adult with a disability.

This week Brown pledged to sustain for another three years the current policy of raising tax credits for poor families with children, to keep pace with earnings. The trouble is that he is also sustaining the policy of raising benefits for these same families only in line with prices. With benefit income worsening relative to the average, tax credits would need to rise even faster than at present in order to get relative poverty down.

Another Brown favourite, health spending, will continue to expand rapidly for at least two years, until the end of the present spending period. But thereafter it will be competing for scarce cash with education, which has been given a new priority in this Budget. Next year’s spending review will have to decide to what extent overall health spending can continue to grow. It will by then have increased from less than 6 per cent to nearly 8 per cent of GDP. This would have fulfilled the pledge made in 2000 to raise health spending to the EU average by 2006, were it not for the fact that other EU countries are also spending more. In an ageing society with ever more expensive treatments available, the Chancellor needs to run to stand still. This week’s suggestion that the answer is to treat more people outside hospital may help at the margins, but will not stem the tide of growing demand.

The message in Whitehall that there is no new money also affects some crucial spending areas that the government has so far shied away from, but where pressures are growing. In the week to come, a report by Sir Derek Wanless will warn that planned funding of long-term care for the elderly is wholly inadequate in the light of future need. The Joseph Rowntree Foundation has pointed to serious gaps already opening up in care provision. But the Treasury will be hard put to find even the modest amounts of extra money needed to plug these gaps today, let alone plan properly for the future.

An even bigger pressure will be to respond to the Turner report on pensions and in particular its recommendation that public pensions keep pace with earnings. This kind of change cannot be funded in the largely ad hoc approach to revenue-raising that has served Gordon Brown well to date. For example, he has been able to take more proportionately from higher-rate taxpayers by not raising tax thresholds in line with their burgeoning earnings. Green taxes such as the road tax on gas-guzzlers are designed to signal Brown’s green credentials rather than raise big money. The cash from these sticks was almost entirely given back in carrots for green behaviour.

Slower growth means that such opportunistic measures may only just be enough to avoid big public spending cuts in the years ahead. To meet new needs, a more systematic approach to raising new money is required. One day, a future chancellor may even dare to utter a phrase last pronounced by Denis Healey in 1975: “The basic rate of income tax will rise…” .

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