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Sunday, 10 June, 2001, 09:50 GMT 10:50 UK
Labour's spending dilemmas

Much of the election campaign was fought on the sensitive issue of spending on public services. The BBC's Dharshini David looks at how easy it will be for the returning Labour government to put its money where its mouth is.

The promise to crank up public spending on key areas was one that this government initially made in 1997 - and what Tony Blair says he wants to be judged on in his second term in office.

On the face of it, Labour appears to have failed to deliver in its first term. Public spending as a whole grew more slowly between 1997 and 2001 - at an average of 1.4% per year once inflation is stripped out - than in the previous parliament. As a proportion of GDP, it actually fell.

But much of this fall was due to weaker growth of spending on social security benefits - thanks to the strength of the economy.

It can also be attributed to smaller interest payments on the government's debt, as the stock of outstanding debt fell.

Stripping these out, spending on key areas such as health and education did actually accelerate in the government's first term -although spending on transport fell in real terms.

Spending plans

One of Chancellor Gordon Brown's early moves was to introduce three-year spending plans, the Comprehensive Spending Review, to encourage a longer-term view when planning expenditure.

However, in effect, these are held every two years. And health and eduction were both allocated extra cash between these reviews - most recently in the March Budget.

As a result, spending on these two areas is set to rise by over 5.5% per year between now and 2004.

Public sector investment was promised some of the most eye-catching hikes in the 1998 and 2000 spending reviews.

This specifically meant capital projects - infrastructure such as hospitals rather than extra nurses.

But so far, the government has failed to spend all the extra cash.

Government departments may just have been slow to react to the new plans, being more used to saving their pennies than splurging. Or new investment projects may simply take some time to identify and get off the ground.

Either way, the government has the challenge of not just promising extra money, but making sure it gets delivered.

Can they afford it?

And the hurdles don't stop there. The government has also to ensure its plans are consistent with its own fiscal rules.

The first is the "golden rule", where it can only borrow over the economic cycle to finance investment spending.

And second, government debt has to be below a "stable and prudent" level - dictated to be 40% of GDP by Mr Brown.

The government's fiscal plans that have already been published, up to 2004, should fit comfortably within these limits.

But like the rest of us, the government can't live beyond its means forever.

"Black hole?"

The real challenge for Mr Brown will come when delivers his spending review next summer.

He will be under pressure to carry on raising spending in areas such as health and education at a rapid rate.

Tony Blair has said that he has an "aspiration" to get health spending as a proportion of GDP up to the European average. That would mean increasing spending in this area by over 5% in real terms per year for at least another four years past 2004.

If Mr Brown did want to carry on raising spending at the current rate past 2004 (i.e. total spending rises at a rate of 3.8% per year) this would mean raising tax, by 5bn per year, according to the Institute for Fiscal Studies - the famous "black hole" which was continually cited by the Conservatives and denied by Labour during the General Election.

Raising taxes is likely to be unpoopular - although its not a huge amount. 5bn is than 2% of the total tax take, and less than 2 per person per week.

But to avoid raising taxes, the government appears to want to get more private sector capital into public sector projects, through schemes like the Private Finance Iniative.

And it wants to push lower the costs of public services by introducing private firms in the managment of health and education.

But the real threat to Labour is a sustained strutural downturn in the economy. That would mean a sharp rise in social security spending , and drop in tax receipts - which could threaten financial stability.

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See also:

18 May 01 | Vote2001
Battle of the Chancellors
25 May 01 | Vote2001
Unions ready for Blair battle
22 May 01 | Vote2001
Analysing the tax battle
09 May 01 | Vote2001
Taxes 'higher under Labour'
16 May 01 | Vote2001
Labour denies spending 'black hole'
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