Treasury committee questions CSR ring-fencing

25 Nov 10
Economists and MPs have today questioned the government’s decision to protect certain areas of spending, such as the NHS budget.

By David Williams

26 November 2010

Economists and MPs have today questioned the government’s decision to protect certain areas of spending, such as the NHS budget.

The Treasury select committee’s report on the Comprehensive Spending Review, published this morning, said that although ministers fulfilled election promises, opting to ring-fence some budgets can lead to ‘allocative problems across government’. 

The move can ‘distort spending priorities, particularly in a radical review such as this’ and ‘reduce scrutiny’ in protected departments, the MPs said.

The report also points out that some of the ring-fences already appear to be ‘slightly porous’. It notes that Department of Health money is already being transferred to social care, while Department for International Development cash is being used to support states stricken by war.

The committee said the Treasury ‘should not be afraid to demand that spending currently ring-fenced in certain areas be used where the benefit is the greatest, or where greater value for money can be obtained’.

Carl Emmerson, acting director of the Institute for Fiscal Studies, said the committee was in effect calling on the Treasury to force departments to relax or remove their ring-fences where it was beneficial to do so.

He said it was not clear that it would have been possible to cut the NHS budget, even if it had not been ring-fenced.

‘Ring-fences are only distortionary if they bind,’ he said.  ‘What we don’t know is what the world would have looked like if they hadn’t ring-fenced the NHS, whether it really would have had deep cuts.’

The MPs report also said it would have been ‘very hard’ for the overall fiscal consolidation to have been progressive.

Patrick Nolan, chief economist at the Reform think-tank, said it would have been easier to have put together a progressive CSR if no department had been protected.

‘They are ring-fencing a lot of benefits that go to higher-income earners, but then tightening up Housing Benefit and other benefits for lower-income earners – of course it’s not going to be progressive.

‘The problem is the political incentive is to protect the benefits that are widely-received but are not necessarily providing value.’

He added that the comparatively generous Welsh local government settlement was possible because no areas have been ‘arbitrarily’ protected. It showed it is fairer to cut across a broader base.

‘Otherwise you open yourself up to the accusation that you’re picking on people… the whole process gets undermined because people start to argue for their exemptions,’ Nolan said.

Ray Barrell, acting director of the National Institute for Economic and Social Research, told Public Finance: ‘It may be politically expedient to say the NHS budget will be protected before an election, but it’s unwise to do it afterwards.’

He explained: ‘If you decide you have to cut all spending, there’s a case for cutting everything by around about the same percentage.

‘If you were in the optimum position before, it’s probably best to adjust them all by a similar amount.’

Treasury committee chair Andrew Tyrie, said: 'Today’s report is a first step towards a higher level of scrutiny of public spending than previously undertaken. Whilst there is general party political agreement that consolidation is necessary, there continue to be differences over its precise method, timing and pace. It will be a major challenge to ensure that all parts of the United Kingdom benefit from future growth.'

Read Public Finance's profile of Andrew Tyrie here

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