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Last Updated: Thursday, 18 March, 2004, 17:34 GMT
Spending battle follows Budget
By Steve Schifferes
BBC News Online economics reporter

Cash register
Has booming economy has not put enough in the Chancellor's coffers?
Despite the brave words from the chancellor, the squeeze will be on spending departments after the Budget laid out the broad spending plans into the next Parliament.

Mr Brown announced he was sticking to his spending plans that had been penciled into his pre-Budget report, and said he was giving substantially more money to education as well as sticking to his plan to boost health spending.

But the overall spending plans represent a sharp cutback in the rate of growth of public spending, which will stabilise as a proportion of the economy.

According to Carl Emmerson of the Institute for Fiscal Studies (IFS), the growth rates for the bulk of government spending "are relatively low compared to spending growth in the previous review period" at 1.4% in real terms.

Even the growth in education spending is less than it seems, with rapid growth in the first year of the planning period slowing to 3.2% in the last two years, below its long-term historic average.

Overall, under Mr Brown's plans, spending in 2007-8 will merely have returned - as a percentage of the economy - to level when Labour came to power in 1997.

Mr Brown will announce details of how much each individual department will receive over the next three years in July, in the Comprehensive Spending Review.

A guide to the ups and downs of the UK economy

But most departments will find that their spending will grow at a slower rate than the economy as a whole, and although Mr Brown pledged "no cuts in real terms" for defence and crime-fighting, both departments may face tough choices over their spending priorities.

According to Peter Robinson of the Labour-leaning think tank, the Institute for Public Policy Research (IPPR), "The stakes could not be higher.

"There are few public services which spending as a proportion of GDP can be cut without that impacting on the services offered and the outcomes achieved," he says.

He says the pressure will be on departments like the police and the military to justify their spending plans - and transport, agriculture and housing could be particularly vulnerable.

Mr Robinson also thinks that if the government is to meet its poverty targets, social security payments and child tax credits may have to rise by around 5bn, putting further pressure on departmental budgets.

Fighting waste

Mr Brown is hoping that one way out of his dilemma is to make efficiency savings across Whitehall.

DEBT PREDICTIONS
2003/04: 37bn (up 10bn)
2004/05: 33bn (up 9bn)
2005/06: 31bn (up 8bn)
2006/7: 27bn (up 5bn)
Figures show Mr Brown's current predictions compared with his forecasts in April 2003

He has already called for a reduction by 40,000 in the number of civil servants, and wants all departments to save 2.5% each year in "efficiency savings" over the next 3 years.

But, as IFS Director Robert Chote pointed out, there is no clear way of measuring whether these efficiency savings are achieved, because we are not able to accurately measure the output of government departments.

So these will remain notional targets for departments to achieve, and real cuts in their spending if they don't.

That means that the accuracy of Mr Brown's forecast for tax revenue is still crucial.

The IFS, and many other independent forecasters, still think he is being too optimistic about how much additional revenue the government can raise in the future to reduce the Budget gap to prudent levels that reflect the Chancellor's own fiscal rules.

They project a 13bn gap by the beginning of Mr Brown's next economic cycle starting in 2005-6.

The IFS points out that if the Treasury is correct, then Mr Brown can afford his spending plans - and then the Tories can also afford their tax cuts.

But if they, and many other independent experts, are right, then the "clear red water" between the political parties on their tax-and-spending plans will become muddied by the need to find more cash or bigger spending cuts - something that no politician wants to contemplate going into an election.





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