Sharing the fruits of growth, by Carl Emmerson

2 Feb 06
Conservative Party pledges to alter the proportion of economic wealth allotted to the public sector may prove to be rather similar to what Chancellor Gordon Brown has announced in his Pre-Budget Report

03 February 2006

Conservative Party pledges to alter the proportion of economic wealth allotted to the public sector may prove to be rather similar to what Chancellor Gordon Brown has announced in his Pre-Budget Report

Opposition leader David Cameron has pledged that a Conservative government would share 'the fruits of economic growth between lower taxes and strengthened public services'.

On the face of it, this is not a particularly informative commitment — most UK governments have done this most of the time.

In practice, the Conservatives have a rather more restrictive interpretation of the statement in mind, but it would still be in line with the tentative public spending plans that Chancellor Gordon Brown set out in his recent Pre-Budget Report.

This suggests that, in terms of overall levels of taxation and spending, there may be little to choose between the two main parties at the next election.

So how big are the fruits of economic growth and what might sharing them actually mean for public spending?

In the current financial year, the Treasury expects the economy to generate income of £1,225bn. This is expected to grow by £58bn to £1,283bn next year. Just over half (£31bn) is inflation and the remainder (£27bn) is due to expected increases in the quantity of goods and services produced.

This real increase reflects both an expected increase in the number of hours worked (primarily due to growth in the working age population) and an increase in the goods and services produced from each hour worked as we become more productive (thanks, for example, to technological advances).

Total public spending is forecast by the Treasury to be £519.9bn in the current year, or 42.4% of national income.

Not giving any of the fruits of economic growth to public spending implies freezing it in real terms. This would mean public spending falling to 41.5% of national income next year.

An alternative extreme — which might still be considered to be consistent with 'sharing' — would be to spend all of the extra £27bn publicly. This would lead to public spending growing to 43.7% of national income.

The graph shows what has happened to public spending as a share of national income since Labour came to power in May 1997.

This is now higher than the level that they inherited from the Conservatives and is expected to rise between this year and next, before declining slightly to 42.8% of national income in 2007/08.

For the following years no firm plans have yet been set out by Brown, but the figures that he pencilled in at last December's Pre-Budget Report imply it falling further, to 42.1% of national income in 2010/11.

Also shown in the figure is the amount that would have been spent had all of the increase in national income that year been spent publicly (the red line) and the amount that would have been spent had none of it been spent publicly (the blue line).

Interestingly, under this broad definition of sharing the fruits of economic growth, Brown has, to date, only strayed outside the range once. This was in 1997/98 when public spending, after economy-wide inflation, actually fell.

Over the period since 1997/98 both public spending, and the part of national income not spent publicly, have both risen in real terms — which would therefore comply with the broad interpretation of what 'sharing the fruits of economic growth' might imply.

Last week shadow chancellor George Osborne stated that: 'Over an economic cycle, output will grow faster than public spending.'

This is a more restrictive interpretation of 'sharing', since it implies that, over the medium-term, public spending would be cut as a share of national income.

It is clear that Brown has not sought to achieve this. His figures show public spending rising by 3.5% of national income between the first and last years of what he believes to be the current economic cycle.

But the provisional spending plans set out in the Pre-Budget Report for the period from April 2008 to March 2011 suggest that, thereafter, Brown might be planning to run the public finances in a way that would be consistent with the Conservatives' rule.

In our Green Budget 2006 publication last week, we set out how difficult it would be for the chancellor to reconcile those spending plans with his aspirations for improving public services and reducing poverty, both in this country and overseas.

Furthermore, even if those spending plans were kept to, our forecasts suggest that new tax-raising measures might be required to meet the chancellor's rules for borrowing with the degree of caution that he has sought in the past.

As a result, by pledging to keep to those spending plans, Brown would also make it difficult for the Conservatives to be able to go into the next election with firm commitments to tax-cutting measures.

Carl Emmerson is deputy director of the Institute for Fiscal Studies


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