Analysis Turning off the spending tap, by Carl Emmerson and Christine Frayne

29 Mar 07
The Budget confirmed how much or little the Comprehensive Spending Review will have to play with. Whatever juggling goes on, something's got to give. But which government pledge will it be?

30 March 2007

The Budget confirmed how much – or little – the Comprehensive Spending Review will have to play with. Whatever juggling goes on, something's got to give. But which government pledge will it be?

In last week's Budget, Chancellor Gordon Brown confirmed that overall spending for the three years covered by the forthcoming Comprehensive Spending Review — 2008/09, 2009/10 and 2010/11 — is set to increase by an average of 2% after economy-wide inflation.

The spending plans are much tighter than those of recent years. Brown has already pre-empted the CSR by announcing some of the departmental allocations in advance and thus also giving a greater indication of what the settlements for remaining departments might be.

The 2% annual real growth rate in public spending compares with the 4% of previous spending reviews covering 1999/2000 to 2007/08. As this is lower than the expected rate of growth of the economy, the Treasury expects that public spending as a share of national income will fall from 42.6% in 2007/08 to 42.0% in 2010/11.

This 0.6% cut corresponds to £7.7bn in current terms. Some of this will be borne by administrative departments (such as Revenue & Customs and the Treasury itself), while the Home Office is also freeing up money for other departments. The chancellor has already announced that its funding will be frozen in real terms over the years of the CSR.

Nevertheless, once these departmental allocations are taken out of the pot, there is still £2.4bn worth of cuts in spending as a share of national income to be found, presumably by Brown's successor at the Treasury.

The Budget announced that one area that will feel the tightness of the spending round is education. Although Brown only recently talked about his commitment to education and his aim to increase per pupil school spending in the state sector to match that in the private sector, the funding growth for the CSR years will be less than half the increase seen since 1999/2000.

When Brown set out the education allocation on Budget day, he announced that its funding would no longer increase as a share of national income but would rise by 2.4% a year after economy-wide inflation.

Where does this leave his pledge about state school spending? In 2005/06 the average per pupil spending in the private sector was £8,000, while in 2007/08 state spending per pupil will be £5,263. With the number of children in state schools set to decline slightly, the gap between the two will fall by almost £100.

As the figure above shows, the CSR allocation will allow an additional increase of £453 — but it is unlikely that the chancellor will be able to close the remaining £2,200 gap in the near future. After all, it would require an extra £17bn on top of the increases allocated over the CSR years.

A tight education settlement does, however, free spending for another priority public service — health. In 2002, the Wanless review recommended that funding for the NHS should increase by at least 4.4% a year over the five years after 2007/08. Doing this would increase the cut in spending as a share of national income to be found from other departments by a further £6.3bn — on top of the £2.4bn that already needs to be found.

Although the NHS has received an average of 7.2% more each year in real terms since 1999/2000, an increase of 4.4% might now be considered prohibitively burdensome on other departments. It would mean that, given plausible scenarios for spending on social security and debt interest repayments — and assuming that steady progress is to be made on the government's pledge to increase overseas aid — remaining departments such as Defence, Transport and the Environment would be likely to have no after-inflation increases at all.

An alternative scenario might be to have lower increases in NHS spending. For example, were it to receive annual increases of 3.4%, which would be in line with the long-run trend since 1950, this would allow spending on the rest of government to receive an after-inflation increase of about 1% per year.

This would be in line with what they are set to receive between this year and next.

This assumes that the spending plans will be delivered. In practice, the next chancellor could choose to top these spending plans up, which would make meeting the government's aspirations for improving public services and reducing child poverty easier to meet.

However — unless government borrowing comes in lower than expected — this would be likely to require further tax-raising measures.

Carl Emmerson and Christine Frayne are respectively deputy director and senior research economist at the Institute for Fiscal Studies

PFmar2007

Did you enjoy this article?

AddToAny

Top