Gordon Brown should not dismiss public spending discipline so lightly

5 December 2005

 

Reform response to the Pre-Budget Report

 

Tax burden to rise over previous forecasts

 

§         The Pre-Budget Report announced a very slight increase in the tax burden compared to previous plans.  In 2009-10 the tax burden will reach 38.6 per cent of GDP, up from 38.5 per cent in the March Budget.  Either figure would be the highest since 1984-85.

 

§         The Pre-Budget Report confirms that public spending will increase until 2007-08 at the same trend that it has followed since 1999-00.  Over the period, it will have risen by nearly five percentage points of GDP.  After 2007-08, it will level off.

 

Borrowing prediction rises again

 

§         The Pre-Budget Report yet again increased the level of borrowing for this financial year.  In 2001, the Treasury expected to borrow £12 billion in 2005-06; this year, it expects to borrow three times as much.

 

FORECASTS FOR BORROWING IN 2005-06 INCREASE AGAIN
£billion	2005-06 net borrowing
2001 Budget	12
2002 Budget	17
2003 Budget	23
2004 Budget	31
2005 Budget	32
2005 Pre-Budget Report	37
Sources: Budget 2001, 2002, 2003, 2004, 2005, Pre-Budget Report 2005, HMT

 

Poor public sector productivity has depressed economic growth

 

§         The Chancellor’s explanation for lower than expected economic growth failed to include the effect of falling public sector productivity.  If public sector productivity had matched private sector productivity since 1999, whole economy productivity growth would have been 2.75 per cent per year on average, compared to the actual figure of 2.1 per cent.

 

§         Similarly, if public sector inflation had matched private sector inflation since 1999, whole economy inflation would have been 1.7 per cent per year on average, compared to the actual figure of 2.3 per cent.

 

§         Economic studies suggest that the rise in the tax burden between 2003-04 and 2008-09 – amounting to three percentage points of GDP – will reduce the trend rate of growth by 0.3 per cent in the long term.

 

A “Growth Rule” could reduce the basic rate of income tax by 5p over this Parliament

 

§         In February 2005, in its Manifesto for Reform, Reform put forward the idea of a “Growth Rule” – that departmental spending should rise in real terms by less than the growth rate of the economy to enable spending increases on public services and reductions in taxation.

 

§         The Chancellor explicitly attacked such a proposal in his speech today, saying that it would result in lower levels of public spending.  That is only true, however, in relation to the Government’s plans.  In real terms, spending on services would increase but at an affordable rate.

 

§         In this Parliament, the better way would be to increase departmental spending at two percentage points below the rate of growth of the economy – in line with Reform’s “Growth Rule” – in order to control spending and reduce taxation.  On such a policy, by the end of the Parliament, the saving would be £27 billion, sufficient to reduce the basic rate of income tax from 22 per cent to 17 per cent.

 

§         Those who argue that public services would suffer should recognise that the extra spending of recent years has led to increased costs rather than substantially higher standards.  Standards in secondary schools, for example, increased just as quickly between 1994-95 and 1998-99, when spending increased by 3 per cent in real terms, as between 1998-99 and 2002-03, when spending increased by a third in real terms.  The extra spending has led to inefficiency; a period of spending restraint coupled with more wide-ranging reform would both improve services and keep them affordable.

 

Voters lose confidence in Gordon Brown’s prudence

 

§         ICM’s latest poll for Reform indicates:

 

–          78 per cent of voters believe that taxes will be higher at the end of this Parliament than they are now.

 

–          Voters’ confidence in Gordon Brown’s “prudence” is waning.  Over half (51 per cent) believe that Gordon Brown is becoming an imprudent Chancellor who has spent too much against 41 per cent who think he is still prudent.  In November 2004, the equivalent figures were 48 per cent and 45 per cent. 

 

–          Most voters believe that the extra resources given to public services have not been used effectively.  Nearly two thirds believe that the extra spending has not delivered real improvements in the NHS and a majority believe that extra education spending has not greatly improved state schools.

 

–          ICM interviewed a random sample of 1,013 adults aged 18+ by telephone between 30th November and 1st December 2005.  Interviews were conducted across the country and the results have been weighted to the profile of all adults.  ICM is a member of the British Polling Council and abides by its rules.  Further information at http://www.icmresearch.co.uk.

 

§         Andrew Haldenby, Reform’s Director, said: “Gordon Brown should not dismiss public spending discipline so lightly.  The rising tax burden will depress economic growth for years to come.  Spending restraint and reforms based on choice and accountability would deliver better public services, lower taxes and a more competitive economy.”