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10 July 2000

T*x: time to mention the t-word

The Treasury has risked undermining Labour's credibility with its smokescreen over public spending

By Peter Robinson & Simon Heffer

From the start, the Labour government has undertaken a great gamble with the electorate on public spending. Labour entered the 1997 election with a pledge to stick for two years to the previous government’s spending plans. In practice, since the Tories had spent heavily in the pre-election period, public spending fell in real terms between 1997 and 1999.

Some public-sector workers and users of public services may already have concluded that Labour is no different from the Conservatives. But expectations are high for the results of the Comprehensive Spending Review, due in a few days. The global total was first announced last autumn in the pre-Budget report. In the current financial year, overall public spending will rise by 5 per cent in real terms, twice as fast as the underlying growth in the economy, and fast enough to concern the financial markets, worried that domestic demand will be given an unhealthy boost at precisely the wrong time.

Will this be enough to rescue Labour’s reputation as the standard-bearer for well-funded public services? Its plans to increase health spending by more than a quarter in real terms over the next four years are generous by any measure. And spending on education this year will rise even faster than on health – a real increase of 9 per cent, compared with 7.4 for health.

The trouble is that the public has heard such figures before, and ministers may find it increasingly difficult to convince the voters of the credibility of their announcements. The much-vaunted extra £21bn for health and £19bn for education, announced in 1998 as part of the first Comprehensive Spending Review, relied on double- and triple-counting that raised expectations and fostered cynicism in equal measure. If presented correctly, the cash increase in public spending in education over three years would have been £9.6bn, starting from 1999, and coming on top of two years (1997 and 1998) when education spending was frozen in real terms.

The way the Treasury presents its numbers also suggests that it has never heard of inflation. With public spending totalling £374bn this year, overall spending has to rise by more than £9bn a year to compensate for higher inflation. Gordon Brown could announce an increase in public spending of up to £30bn over three years, and this would mean no more than spending standing still, in real terms.

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Moreover, planned spending is not the same as actual spending. Labour has enormously undershot the Budgets on its flagship policies. Of the £5.2bn raised through the windfall tax on the utilities, by April of this year the government had managed to spend only £800m on its flagship New Deals for the jobless. Last year, spending on the flagship regeneration programme, the New Deal for Communities, undershot by half, and spending on Sure Start, a programme aimed at pre-school children, may come in at only a tiny fraction of the £81m budgeted for in 1999-2000.

Even more important is how far any spending actually delivers the desired outcomes. Labour has insisted on public service agreements, whereby spending departments have to focus on the improved outcomes they propose to achieve in re-turn for extra money. But do these go far enough? Can the question be properly addressed at departmental level?

For example, in order to boost educational attainment, it is not obvious that you should put all your money into schools. Child poverty has a very strong association with attainment, so reducing child poverty by spending even more than is currently committed to increased benefits for families with children might do as much to raise attainment as more money for schools. Equally, a reduction in preventable deaths among the elderly might as easily be achieved by reducing pensioner poverty as by spending more on the NHS. Such trade-offs are rarely addressed. On the contrary, Labour started off with the idea that it would pay for extra spending on health and education by reducing the “burden” of welfare spending, a notion that has long since been abandoned. Indeed, if you are serious about ending child poverty and promoting security in retirement, the benefits bill is bound to rise, and rightly so. If we count the working families tax credit as a benefit payment (which the Department of Social Security does, but the Treasury, curiously, does not), then social security spending is now rising in line with GDP.

So will this year’s large planned boost to spending make up for half a parliament of hairshirt economics? We will find out some time next year whether the gamble has paid off. On current projections, total public spending will be 39.5 per cent of GDP at the next election, assuming it is held in 2001. At the election after that (if held in 2005), public spending will be about 40.5 per cent of GDP. This compares with 41.2 per cent in 1996-97.

In other words, Labour will be trying to deliver significantly better public services than the Tories with a slightly lower share of the nation’s resources. Given that the public’s demand for core public services tends to rise at least as fast as overall national income, this is a very challenging agenda.

Does a public-spending ratio of around 40 per cent of GDP represent some kind of natural equilibrium? Last year, Tony Blair and Gerhard Schroder, the German chancellor, announced that the limits to public expenditure had been reached. This was curious when public spending in Germany in 1999 was 47.3 per cent of GDP against 40.4 per cent in the UK. If some upper limit had been reached, why was this limit so different in the two countries?

In economic terms, edging up public spending as a proportion of GDP is a perfectly feasible option, provided we also raise taxation proportionately to fund this. The best way to argue for this is to advocate it as transparently as possible. By trying to be too clever by half, the Treasury has risked undermining public confidence in the basic honesty of the government, so that they may not believe Labour if and when it does try to argue the case for Britain developing a progressive social democratic model around a generously funded welfare state. Given that Brown could be regarded as one of the Cabinet’s most genuine social democrats, this is irony indeed.

The writer is senior economist at the Institute for Public Policy Research