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CSR Tuesday, 18 July, 2000, 18:03 GMT 19:03 UK
Strong economy aids spending
The government's economic good fortune and its tight controls on the purse strings have put it course to deliver strong growth and boost public spending.

The Chancellor, Gordon Brown, told Parliament as part of his three-year public spending review that only his "sustained and sustainable" increase in public finances had made this possible.

The sustained and sustainable improvement in our public finances makes possible a sustained and sustainable improvement in our public services

Chancellor Gordon Brown
That had freed money to deal with years of underinvestment in public services and to close the productivity gap with the UK's competitors.

But overall, government spending will only rise modestly in terms of the overall economy.

By the end of Comprehensive Spending Review, government spending will make up 40.5% of the total economy - slightly less than the 41.2% that was spent by the Tories in their last year in power.

Fiscal discipline

Mr Brown said that fiscal discipline would be maintained, with continuing reduction in public debt while still boosting spending.

The strong growth of the economy this year meant that the government's budget surplus was even bigger than expected.

And there was an underspend of 4.5bn by government departments compared to original plans.

In the fiscal year that ended in March 2000, the government received 20.4bn more in taxes than it spent, compared to predictions of a 17.1bn surplus.

And debt had been reduced further than expected, with a record debt repayment of 18.1bn.

Debt as share of GDP is being reduced from 37.1% to 36.8%.

Mr Brown said that in order to continue to strengthen the public finances, all proceeds from the sale of mobile phone licenses would go to reducing the public debt.

Government departments will sell 4bn worth of unneeded assets each year to help boost revenues.

Tighter fiscal discipline has also meant higher taxes. The Budget projections show that taxes rose quickly in the first two years of the Labour government, before stabilising and now slowly rising.

The government has now made it clear that further spending, rather than tax cuts, are the priority.

For the Conservatives, Shadow Chancellor Michael Portillo said that they would fight the election as the low tax party.

And the Liberal Democrats argued that the money was too little, too late.

No longer paying the price of failure

The biggest boost for the government, however, has been the reduction of 3.5bn each year in spending on social security, including unemployment, and from lower bills on debt interest.

That has allowed the government to boost spending on individual departments by 43bn.

In the past, 42% of additional public spending was allocated to paying for the cost of social security, but in the next three years it will take a far smaller share.

Unemployment, social security, and debt interest will account for only 17% of extra spending, leaving 80% for departments like health, education and transport.

That is because the government has assumed that in the future, spending on these items will increase by only 1.5% each year, compared to 2.5% in previous plans.

But the government's assumption that it can keep social security spending from rising faster than the rate of inflation could be risky in the longer term.

It hit political flack when it only raised the basic state pension by 75p a week last November.

And If there was to be an economic downturn, not only would tax receipts fall, but spending on items like unemployment would be likely to rise.

According to Martin Weale of the National Institute of Social and Economic Research, such savings will require further cuts in the benefit budget, and further drops in unemployment.

The government is also projecting economic growth of 3% this year and 2.5% next year - high figures by historic standards, although broadly in line with the forecasts of independent economists.

Switch to capital spending

One of the biggest changes in the government's strategy is its plan to spend much more money on capital projects.

The total amount spent on capital projects will more than double, from 18bn to 36bn in the next three years.

Among the biggest beneficiaries are transport, which gets more than 4bn, and housing, which gets a 12% increase. There are also large increases in capital spending on new school buildings and hospitals.

Another advantage from the government's point of view is different rules apply to capital spending compared to spending on current items like teachers' salaries. Even if there is a downturn, the government argues that it should continue borrow money to invest in capital projects.

See also:

14 Jul 00 | CSR
13 Jul 00 | Business
29 May 00 | UK Politics
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