Page last updated at 16:51 GMT, Wednesday, 1 July 2009 17:51 UK

Dodging the spending challenge

By Steve Schifferes
Economics reporter, BBC News

budget deficit

As the government is announcing new plans for public spending in the next year, it has made it clear it is likely to delay its planned review of future public spending from April 2010, probably until after the next general election.

"The spending period currently operating in government stretches beyond the next election and therefore it is reasonable to review public spending at that time," Business Secretary Lord Mandelson told the BBC on Monday.

Gordon Brown
Mr Brown promised to unveil his vision, but it has been delayed

"We are not in a position, in June 2009, to be able to forecast what growth will be and what the performance of the economy will be in 2011. That is why we have to wait," he said.

And at Prime Minister's Questions, Gordon Brown on Wednesday reaffirmed this position.

It is not clear, however, whether that view is shared by the Treasury, which has always insisted that it will determine when to carry out the spending review.

Conservative leader David Cameron has condemned the government as "dishonest" and says it is a "blatant attempt to cover up the truth about Labour's cuts".

We know that a major fiscal tightening is on the cards over the course of the next parliament
Economics editor Stephanie Flanders

However, the Conservatives have made it clear they will only decide on future departmental spending plans after they are in government.

Indeed, all the parties have been battling over future public spending for weeks, despite the fact that an election could be nearly a year away.

Labour has accused the Conservatives of planning 10% cuts in spending for all departments except health, while the Conservatives say that Labour refuses to admit that it is planning to cut public investment and public spending in the future.

Difficult future

But in fact both parties are reluctant to publish detailed spending plans - and for good political reasons: the scale of the possible cuts are truly horrendous.

The independent think tank, the Institute for Fiscal Studies, has estimated that over the next decade the government will have to reduce spending, or increase taxes, by £90bn - that would cost every UK family £2,840 per year by 2017-18.

In the first years of the next Parliament, the government has in fact already published its plans in broad outline.

public spendnig

These show that public spending will fall by 0.3% in real terms. But when the increases in spending that the government does not control are taken into account (such as debt interest and benefits), the real cut in spending by government departments is substantial.

It is also clear that, following the boost in capital spending on bricks and mortar such as schools and hospitals, the government is planning big cuts in capital budgets in the future.

And if the spending in the biggest and most popular programmes are protected - especially those in health and education, which make up half of departmental spending - then the scale of cuts in other departments is very substantial indeed.

The IFS has calculated that if there are no cuts in spending on the NHS - which makes up one-quarter of all spending - then other departments would need to be cut by 9.6% in real terms over the three-year spending review, and if education was also protected, then there would need to be 13.5% cuts.

But, given the scale of the problem, it is not clear whether either party would be able to ring-fencing any big area of spending, whatever individual spokesmen say at the moment.

possible spending cuts

Not enough

But even cuts on this scale may not be enough.

With the government plans still leaving the deficit at 5% of GDP at the end of the next Parliament, the need for a painful adjustments after the next general election in 2010 is increasingly called for by many observers.

The OECD and IMF have both warned of the need for a credible plan to bring the budget into balance, and ratings agency Standard and Poor's has said it is putting Britain's AAA credit rating on review until such a plan emerges.

And the governor of the Bank of England has warned that the cost of government and private borrowing could rise if markets lose faith in the government's credibility. He has urged the chancellor to take action more quickly to address the budget gap.

But for the political parties, the scale of such adjustments could mean big - if temporary - tax rises as well as further cuts in vital public services, something that no one wants to talk about going into a general election.

Labour has already started by introducing a higher income tax rate for the rich, but there have been suggestions that VAT should be raised or some of VAT-exempt items included. In the 1980s recession, the Conservatives raised VAT to balance the budget, while in the 1990s a variety of indirect taxes were increased or created.

The size of the gap between spending and tax revenues - with the government taking in just three pounds for every four pounds it spends - makes it likely that all the big revenue raisers - (income tax, national insurance, and VAT) may have to be tapped in the future.

Government spending

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