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Friday, 11 May, 2001, 17:49 GMT

Public spending

Has public spending increased under Labour, and if so, why don't we see more benefits on the ground?


One of the proudest claims of the Labour Party is that it is giving priority to increasing public spending on popular causes like schools, hospitals, and fighting crime.

But the Conservatives say there is no evidence that these services are getting any better.

And the Liberal Democrats say that Labour's big mistake was to stick to Tory spending plans in its first years in office.

What has happened to all that money the government says it is spending on our behalf?

One answer is that most of it has gone to reduce the public sector deficit that Labour inherited when it came to power.

And more government debt has been retired by Labour than by any other post-war government.

Only in the past two years has Labour increased spending in real terms.

Meanwhile, the Conservatives say they will increase public spending by a lesser amount, and instead introduce tax cuts.


Overall, public spending has actually fallen under Labour as the government turned a 30bn public sector deficit into a 15bn surplus.

According to the independent Institute for Fiscal Studies, government spending shrank from 41.2% of GDP in 1996/97, the last year of the Major government, to 38.8% in 2000/01, the current financial year.

And over the course of its whole four-year term, the IFS says that government spending will have increased by just 1.3% a year - compared to an increase in taxes of 4.8% a year.

During the 1997 election campaign, Labour had promised to follow the spending plans drafted by the Conservative government for the period up to 1999, and it was only after the comprehensive spending review in July 2000 that Labour's spending plans really took off.

Labour's plans are to substantially increase public spending in the next three years, leading to a small budget deficit - but overall spending is still planned to be lower than under the Conservatives.

However, there have been some big changes in what the government is spending its money on.

Some elements of government spending, for example, spending on social security benefits for the unemployed, cannot be strictly controlled, but depend on the state of the economy.

That type of spending has declined substantially as the booming economy has pushed unemployment to record lows.

Social security spending grew at an annual rate of just 1.1% during the four years that Labour has been in power, compared to a growth rate of 3.9% during the five year period that John Major was in office.

And the payment of interest on the National Debt actually fell by 3.6%, compared to an increase of 8.5% in the last government.

This matters because these non-discretionary items make up nearly half of all public spending.

That has left scope for Labour to increase spending on its key services like health and education.

Education spending grew at an annual rate of 3.6% in the past four years, compared to 1.7% during the previous government.

And health spending grew even faster, at an annual rate of 4.8% over the course of this parliament, compared to 2.6% under John Major.


In its Comprehensive Spending Review of July 2000, the government said it planned to increase spending by 3.8% annually over the next four years until 2003-04.

That would include increases of 5.6% in health and 5.7% in education.

Are these affordable?

Most experts believe they are, unless there is a major economic downturn.

The government has built up a public spending surplus of 15bn, 5bn more than it estimated.

However, it will take several years of sustained spending increases before Labour fully makes up the years of severe restraint - and the public begins to feel any of the party's promised benefits of increased service provision.

And experts at the Institute of Fiscal Studies have warned that after 2003-04, Labour would have to increase taxes by around 5bn each year if it wanted to continue increasing spending by 3.8% each year and meet its own fiscal rules.

This has been seized upon by the Conservatives, who say there is a "black hole" in Labour spending plans that means higher taxation is inevitable.

However, Labour has said that its future commitments will depend on the state of the economy, and pointed out that current plans assume that spending will only grow by 2.5% each year after 2003-04.


The Conservatives want to restrain the growth of public spending to no more than the rate of economic growth.

They say anything else is not affordable in the longer-term - and they also would like to leave room for tax cuts.

But they have also pledged to stick to Labour's plans to increase spending on health, education, transport, and law and order.

That means they need to cut back spending in other areas.

They plan to scale back Labour's regional development plans, scrap parts of the New Deal back-to-work schemes, and attack benefit fraud.

Many economists warn that not all of these cuts would necessarily be achievable - for example, all governments promise to tackle benefit fraud, albeit often to little effect.

And some proposed measures - like privatising student loans - would result only in long-term or one-off cost-savings .

But as long as the economy stays buoyant, and indeed if it exceeds Labour's modest growth targets, in reality the Conservatives would not have much difficulty funding their tax cuts through increased revenues, or a slightly larger budget deficit - although that means their ambitions to role back the boundaries of the state would not be achieved.


One reason why spending has not risen faster is that many government departments have failed to spend the money that they have been given.

As a result, public spending this year is likely to be about 5bn less than planned.

Much of the underspend is in big projects like roads or hospitals, which take years to plan.

And the government has changed the rules: departments can now carry forward any money they don't spend into next year's budgets, putting an end to the end-of-financial-year spending rush.

But there are worries that delays are being caused by the need to consider whether to put projects out to public-private partnerships before they begin.

The departments with the biggest underspends are transport, with 500m, and education and employment, with 1bn.

If departments continue to underspend, then Labour's plans to boost public confidence in a 'government that delivers' may take a knock.

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