UK spending plans are recession-proof

8 Oct 98
Chancellor Gordon Brown has denied that the worldwide crisis in financial markets and the possibility of a UK recession threaten the government's extra funding commitments on health and education.

09 October 1998

Mr Brown said that the funding was secure because the plans outlined in the Comprehensive Spending Review were 'cautious and prudent'. Built into the government's spending plans for the next three years were surpluses of £7bn, £10bn and £13bn, which would provide security from a downturn in the economy.

Doubts over the government's ability to fulfil its commitments followed the chancellor's speech at the annual meeting of the International Monetary Fund and World Bank in Washington on Tuesday.

Mr Brown said that slower world growth would inevitably affect the UK economy. Although he did not explicitly state this, it was reported that the Treasury was about to revise the estimated 1999 growth rate down to 1%, well below the 1.75%–2.25% forecast in the Budget.

This could result in lower tax receipts, putting pressure on public finances,especially as the chancellor's 'golden rule' means that he will only borrow to invest.

The turmoil in financial markets worldwide is also causing jitters among pension fund managers. Local authority pensions, traditionally based on final-salary schemes, are particularly susceptible to the ups and downs of the equity market.

'Local authority employers are in a more exposed position because they are guaranteeing the balance of the cost of the scheme regardless of what the investment performance is,' said Simon Fox, an associate of consulting actuaries Bacon & Woodrow.

He compared this situation with a private sector employer running a money-purchase scheme. In this case, the employer is only committed to contributing a certain percentage on pay. Whatever that buys on retirement is what the pensioner receives as a pension.

Mr Fox said: 'It is really a question of who bears the investment risk and uncertainty. In a money-purchase arrangement it is the employee. In a final-salary arrangement it is the employer.'


Did you enjoy this article?