Brown’s ground zero

7 Oct 05
PETER RIDDELL | Tighten your belts. Anyone working in the public sector should realise that the days of plenty — well, at least, not of starvation — are going to end in a couple of years.

Tighten your belts. Anyone working in the public sector should realise that the days of plenty — well, at least, not of starvation — are going to end in a couple of years.

The coming few months will be a time of self-examination and rigorous scrutiny. That was one of the messages from Tony Blair and Gordon Brown at the Labour Party conference, reflecting the start in Whitehall of the second Comprehensive Spending Review.

There has been considerable confusion about what is going on. The economic slowdown, and consequent rise in public borrowing, should not have a direct bearing on the review.

In his Pre-Budget Report next month, Brown will confirm less favourable growth and fiscal figures than the Treasury projected in the March Budget. But such weakness does not mean we are in, or likely to be in, a recession. The economy is still, just about, growing, albeit more slowly than for 12 years. In these circumstances, it is reasonable to absorb the impact of lower than expected tax receipts in higher public borrowing.

The real issue is over the underlying fiscal position: whether there is a structural deficit, as most economists claim, and how large it is. However, the weak economy removes any room for manoeuvre. But this had largely disappeared as a result of the increases in spending in the 2002 and 2004 reviews.

Moreover, Brown has been widely criticised for effectively rewriting his fiscal rules in late July to give himself a further £12bn. The consensus of independent economists is that the chancellor will either have to raise taxes or trim back his spending plans if he is to meet his fiscal rules over the longer term. It is a question of when, not if.

So regardless of the short-term weakness of the economy, the next public spending round will be tight. The overall increase in annual spending will be limited, at most, to the underlying growth of the economy — and this will obviously mean some very awkward decisions over allocation.

Brown decided in July that this review would be a more fundamental one, not only, in his own words, covering the next ten years, but also considering ‘from a zero base the next stage of meeting our public sector objectives’.

This will be a two-year process, thus postponing the usual twice-yearly review of spending plans from 2006 until 2007. So the already announced allocations for 2007–08 are being left in place, and in 2007 the government will announce both the overall totals (the envelope) and the allocation between departments for the years 2008–09, 2009–10 and 2010–11.

Next year, a report will be made on public spending challenges. In late July, these were defined as the rapid increase in the old age dependency ratio as the ‘baby boom’ generation retires; the impact of increased global competition; an acceleration in the pace of innovation; uncertainties over international terrorism and global conflict; and pressures on natural resources and global climate from population growth and the demand for fossil fuels. All have spending implications.

So the effectiveness of existing spending programmes in fulfilling targets will be assessed along with these challenges. This will complement the long-term reviews already under way into the future of transport, skills, pensions, and local services.

Blair then appeared to muddy the waters by announcing in his party conference speech that, next July, the government would publish ‘a fundamental savings review of all spending; where we can save, where we need to spend more; how we keep investment flowing in to our priorities but keep our tax system competitive for our economy and help hard-working families to increase their prosperity’.

These words led to some reports that 10 Downing Street was launching a separate, and parallel, exercise to the Treasury review. But this is mistaken. What Blair was talking about was the same interim report in 2006 on public spending challenges that Brown announced in July. But the reference to the tax system shows Blair’s worries about any increase in taxes.

The interim report is likely to identify upward pressure on spending and the government’s priorities for the next ten years. But specific decisions on how much spending on, say, education or the NHS will rise will not be made until spring 2007.

Yet in parallel with the review will be decisions on pensions, civil nuclear power, the future of the nuclear deterrent, etc. Moreover, when spending plans are announced in spring 2007, they will cover the period up to, and well beyond, the date of the next general election.

So at stake is not only Blair’s legacy but also, crucially, what is likely to be Brown’s programme and priorities.

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