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banner Friday, 14 July, 2000, 12:39 GMT 13:39 UK
Spending spree to follow prudence

The government's second Comprehensive Spending Review, which will reveal its spending plans for the next three years, comes at a fortunate time.

The UK economy has weathered the economic storms from the Asian economic crisis, and is now growing at a vigorous 3% per year.


And the public finances are in surplus, helped by surging tax receipts and the severe restraints on public spending in the first two years of the government's term of office.

That has led the government to pledge to increase public spending by 3.3% annually for the next three years.

That amounts to an increase of around 48bn, from 392bn next year to 440bn in 2003-4.

Nevertheless, big pledges already made by the government - most notably to increase public spending on health to the European average - will limit the amount of money the government can give away for other things.

But the Comprehensive Spending Review is likely to hammer home the message that improvements in popular public services, not tax cuts, are now Labour's priorities.

Healthy finances

The government has continued to reap the benefits of strong economic growth.

That has meant that despite the increased spending, the proportion of the total economy taken up by government spending has stabilised at around 40%.

That has led to lower interest rates on government debt, and allowed the government to use some of its surplus to cut the size of that debt burden.

It also benefited from another windfall gain of 22bn through the auction of the new generation of mobile phone licenses.

Gordon Brown says he will use that money to reduce the debt still further, saving 1bn a year on government debt interest payments.

The strong economy has also reduced the cost of government benefit payments by taking more people into work.

That has led to a lower-than-expected bill for social security, the largest item of government spending.

Unlike other departments, the government is only able to estimate future spending on benefits, and allocations will not be included in the spending review.

Dividing up the pie

The government has already indicated two of its biggest priorities in spending will be health and education.


On health, the prime minister pledged in January that he would bring UK spending up to European levels over the decade. The independent Institute for Fiscal Studies has calculated that requires an increase of 5.6% annually in the health budget - a huge rise by historic standards.

That would be an increase of 24bn over three years.

Education is another area of government priority where spending had been squeezed in the past.

With the government pledged to focus on "education, education, education," many observers expect education spending to get the same big boost as health.

Already there have been calls from the university sector for more money to deal with increased student numbers.

But Gordon Brown also has another objective - to increase government capital spending on bricks-and-mortar projects like schools, hospitals, and roads.

The increase in public infrastructure is aimed at boosting Britain's long term productivity, and the government plans to increase capital spending by almost 50%, from 12bn yearly to 18bn.

That would signal a big increase for transport. Some additional money will come through the private finance initiative, which aims to bring more money for major modernisation projects like refurbishing the London Underground system.

Uncertainties remain

Satisfying all these demands, as well as some more money for crime, scientific research and international aid, will require some fancy footwork by the Chancellor.

One of the biggest uncertainties concerns demand-led expenditure on social security and debt repayments.

Achieving all the government's ambitious objectives depends crucially on keeping spending down in this area. The government is likely to project these items to grow at only 1.5% annually, well below the growth of the economy as a whole.

But as a House of Commons research paper points out, if these items (known as annually managed expenditure) grow at the same rate as the economy as a whole, there would be 22bn less to spend on other departments by 2003-4.

Conversely, if the government is able to squeeze social security spending even more, with AME increasing by only 0.5% annually, then some 33bn more would be available for other spending.

The past record shows how uncertain projections about government spending can be.

Initially, departmental spending was lower than expected, as restraint continued to bite.

More spending was added to key departments like health and education in the interim when the government got into political difficulties.

Now, the government's future plans are predicated on the economy growing by around 2.5% each year, near its historic average.

If that happens, the government will still have a small budget surplus of 0.7% of GDP even after three years of increased spending.

But a severe recession could still squeeze those figures, and force the government to chose between higher taxes or a smaller expansion in public spending if it wants to meet its self-imposed fiscal rules.

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See also:

13 Jul 00 | Business
Big spender 'still prudent'
29 May 00 | UK Politics
Brown 'plans 40bn boost'
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20bn windfall from phone auction
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Blair pledges health cash boost
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Brown's Budget gamble
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Strong growth and more spending
22 Mar 00 | Budget2000
Analysis: Brown's Budget tightrope
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