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Wednesday, 16 May, 2001, 10:17 GMT

Labour denies spending 'black hole'

By BBC economics research analyst Steve Coulter

Tony Blair is promising a radical agenda to reform the public services if Labour is re-elected.

In launching his party's manifesto, he set out a string of promises which aim to transform service delivery in areas like health, education, and transport.

But Labour's record on public spending in the last four years is unimpressive - and an influential think tank has suggested that tax increases could be needed if a new government is to keep to its ambitious plans for more cash for health and education.

A victorious Labour government would have to raise taxes by up to 5bn a year if it is to keep hiking public spending at its present rate, the Institute for Fiscal Studies (IFS) said last week.

Although Labour's current plans to raise spending by 3.8% in real terms to 2003/04 will not empty the government's coffers, further rises on this scale would have to be paid for through higher taxation, the IFS warned.

Shadow Chancellor Michael Portillo seized on the report, saying it showed "Labour wants to go on increasing spending faster than the economy grows."

"That would leave Gordon Brown with a black hole which would have to be filled with higher taxes."

But Labour has refuted the claims, arguing that their plans for later years call for more modest spending increases.

Gordon Brown said that no chancellor would want to commit his party to firm spending plans so far in advance, but that any future Labour proposals would be prudent and affordable.

Labour also argues that cuts in debt interest and social security payments allow it to target spending on health and education without having to raise the overall spending total.

Where's the spending?

Labour is vulnerable to Conservative jibes over the increasing tax burden over the last four years.

And it has also been stung by accusations that it is not producing the goods on public spending.

Despite the 72bn of extra cash for essential services promised in last summer's spending review, public spending as a share of the total economy is actually lower now than under the Conservatives.

Figures from the IFS show that 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 even after it implements its future spending plans, total government spending would be lower than in 14 of the last 18 years of Conservative government.

The Liberal Democrats have pounced on this, lambasting the government for betraying its election promises to mend Britain's crumbling infrastructure.

Matthew Taylor, Liberal Democrat treasury spokesman, said: "Gordon Brown cannot hide the fact that Labour is spending a smaller proportion of national income on health, education and pensions than the Tories ever did."

More for health and education

Over the course of its whole four-year term, the IFS says that government spending will have increased by just 1.3% a year between 1997 and 2001.

This is lower than the growth seen under the Conservatives during their 18 years in office and considerably lower than the increases in taxation which have taken place.

International comparisons show the UK still has one of the lowest levels of government spending in the developed world.

However, Labour will still be able to go into the election as a party committed to funding public services, albeit from a low ebb.

This is because strong economic growth over the last decade has enabled it to switch money from welfare spending and debt payments onto frontline services.

And spending on the key political battlegrounds of health and education is set to increase much faster than under the Conservatives.

Real annual increases in NHS spending will be 4.8% over the course of this parliament, compared to 3.3% under John Major and 3.1% during the Conservative years as a whole.

However, strip out the first two years of the parliament, when Gordon Brown kept the lid on spending, and the planned rate for the period from 1999 to 2004 rises to 6.4%.

This is equal to the highest levels seen in the history of the NHS.

On education, the government has also met its manifesto pledge to increase spending as a share of GDP, which has gone up from 4.7% in 1996/97 to 4.9% in 2000/01.

Current forecasts suggest this will climb to 5.3% in 2003/04.

The Conservatives have pledged to keep to Labour's spending plans on health and education, limiting their scope for tax cuts, while the Liberal Democrats want to increase spending on health and education by around 3bn each.

Failing to deliver?

Labour faces the charge that it talks big on spending and fails to deliver.

Actual spending by government departments has consistently undershot under Labour. Its record is particularly bad on capital investment (for example, roads, school buildings and infrastructure).

Labour has pledged to raise public sector net investment by 60% each year, raising its share of GDP from 0.5% to 2%.

But this year, Labour only managed to spend 4.3bn out of the 7.4bn allocated to that category.

So perhaps it is not surprising that the public is sceptical about the state of public services.

An NOP poll conducted in early May found that only 22% of people believe that the health service has improved, while 36% say it has got worse under Labour.

Only 19% say the transport system has improved and 21% say the police service is better.

Only in relation to schools do more people say that services have improved (31%) than got worse (26%).

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