The Government Departments are masters at spending public money but often far less proficient at ensuring that this translates into better public services.


6 December 2005

 

Reform response to Gordon Brown’s criticism of the “Growth Rule”

 

Key Points

 

§         In February 2005, Reform proposed a third fiscal rule – a “Growth Rule” – to increase departmental public spending at below the rate of growth of the economy.  This aimed to reverse the damaging expansion of the public sector and the rise in the tax burden while still allowing spending to increase in real terms.  The idea has been taken up, in differing forms, by both Conservative leadership contenders.

 

§         Gordon Brown attacked the idea in his Pre-Budget Report statement yesterday and also in his appearance on the Today programme this morning.  He said that such a rule would mean smaller increases in spending than the Government’s existing plans.

 

§         But the Chancellor’s attack is highly disingenuous given that he will, in effect, follow a “Growth Rule” himself throughout this Parliament.  The Pre-Budget Report announced that public spending will increase more slowly than the rate of economic growth after next year.  Between 2006-07 and 2010-11, public spending will rise from 42.9 per cent of GDP to 42.2 per cent of GDP.

 

§         The implication of the Chancellor’s words is that the only way to improve public services is to increase spending at or above the Government’s plans.  This cannot be right given that so much of the extra spending since 1999-00 has made little improvement to the quality of services. 

 

§         In fact a period of public spending discipline, allied to reform, would increase incentives on the public sector to improve efficiency and enable taxes to be reduced from their historically high level.  The Reform Growth Rule would enable a saving of £26 billion by the end of this Parliament, sufficient, for example, to reduce the basic rate of income tax by 5p in the pound.

 

§         Public spending discipline over the rest of this Parliament is likely to expose the lack of reform up to now.

 

The “Growth Rule”

 

§         The Chancellor is currently following two fiscal rules: the “golden rule” (that current spending should be in balance over the economic cycle) and the “sustainable investment rule” (that net debt should be held at a “stable and prudent level”, currently defined at 40 per cent of GDP).

 

§         These rules do not, however, prevent the spending-to-GDP ratio – and so the tax burden – rising.  In its Manifesto for Reform (February 2005), Reform proposed a third fiscal rule – a “Growth Rule” – to control the increase in public spending to manageable levels.

 

          “The current Golden Rule deals only with spending over one cycle and could be consistent with many different projections for the balance of taxation and expenditure.  Over this cycle it has been consistent so far with a growth rate of spending which has far exceeded that of other G7 countries .  An additional rule is needed – that the trend growth rate of departmental spending should be at least 2 per cent lower than the trend growth rate of GDP.  This would relate spending to the longer term trend in the growth rate and on current terms would still allow growth in spending in real terms of 1.5 per cent a year. 

 

          “Such a Growth Rule would reduce risk to the growth rate.  It would also create room for tax reductions so as to promote private savings and ensure fairer treatment of a younger generation which is facing a double burden.  The Growth Rule has to be taken along with the reform programme in public services which will ensure improved value.  Much can be achieved though increasing incentives to use the existing resources more effectively.  The Rule would still leave plenty of scope for effective public services – but would create new options for independence and choice though lower taxation” (Manifesto for Reform, Reform, 2005).

 

§         The idea of the “Growth Rule” has been taken up, in differing forms, by both contenders in the Conservative leadership race:

 

          David Davis has proposed a different version, that overall public spending – including spending on benefits – should increase by one per cent less than the rate of economic growth.

 

          David Cameron has used the formulation that he would “share the proceeds of growth between public spending and tax cuts".

 

Gordon Brown’s attack

 

§           Gordon Brown attacked the “Growth Rule” in his Pre-Budget Report speech yesterday, and again on the Today programme this morning. 

 

          “I have, however, received representations that a third fiscal rule should be adopted: each and every year, irrespective of the needs of the economy and the case for investing in public services, restricting public spending growth to a lower rate than the growth of the economy in order to cut taxes.  On closer examination, what has been called sharing the proceeds of growth, would this year mean spending at least £12 billions lower by next year, at least £17 billions lower than plans” (Pre-Budget Report speech, 5 December 2005).

 

          “I think the issue coming forward will be whether you are prepared to make these investments in public services, or whether, as the Conservatives have already said that under their new leader, they will have a new fiscal rule, an annual fiscal rule, where public spending will be slower than the rate of growth, and at that stage of course we will start seeing public spending cuts if they were in power this year or next year or the year after” (BBC Radio 4, Today, 6 December 2005).

 

§         Gordon Brown’s figures are based on the consequences of David Davis’ growth rule this year if the Conservative Party had won the last general election.

 

The “Growth Rule” would not lead to cuts, but affordable spending rises

 

§           In fact, Reform’s “Growth Rule” would not lead to cuts in public spending, but affordable spending rises that would also make room for tax cuts.

 

§           If departmental spending in real terms was increased by two percentage points below the trend rate of growth of the economy – in line with Reform’s “Growth Rule” – by the end of the Parliament, total public spending would rise by £24.6 billion in real terms.

 

§         That does represent a slower increase than the Government’s plans, with the difference being £26 billion by 2009-10.  This saving could either be used to reduce borrowing, or to cut taxes.  If the money was used entirely to fund tax cuts, £26 billion would allow the basic rate of income tax to be reduced from 22 per cent to 17 per cent, saving a taxpayer on average earnings around £750 a year. 

 

 

TOTAL MANAGED EXPENDITURE (TME) COMPARED

 

£billion

2005-06

2006-07

2007-08

2008-09

2009-10

Spending rise (real, 2004-05 prices)

TME (real, 2004-05 prices) under Government plans

507.2

520.8

537.1

546.7

557.8

50.6

TME (real, 2004-05 prices) under the Growth Rule

507.2

512.3

518.7

525.2

531.8

24.6

Sources: Pre-Budget Report 2005, HMT; Reform calculations

 

Spending discipline allied to reform would improve efficiency and outcomes of public services

 

§           Gordon Brown implied that any spending increase below the Government’s plans would damage public services.  The implication is that public services can only improve if they receive considerably greater resources.  But Reform has shown how the increase in spending on public services has made little, if any difference to the trend in performance.  For example:

 

          The trend of GCSE performance improved at the same rate between 1998-99 and 2002-03, when spending increased by a third in real terms, as between 1994-95 and 1998-99, when spending increased by only 3 per cent in real terms (Public expenditure on education and skills, House of Commons Education and Skills Committee, December 2004).

 

          The trend of falling deaths from cancer and heart disease has remained the same since 1999 as over the previous 20 years.

 

§         Independent commentators, such as the OECD and the IMF, have commented that the speed of the public spending increases have led to waste and inefficiency in the public sector.  Reform has shown that the absence of reform has led to rising costs and falling public sector productivity.  Conversely, where reform has been introduced, performance has improved.

 

§         A period of public spending discipline would increase incentives on the public sector to improve efficiency; a programme of reform would enable it to improve performance.

 

In effect, Gordon Brown will himself follow a growth rule

 

§         Strikingly Gordon Brown himself is to follow what amounts to a growth rule for the rest of this Parliament.  The Pre-Budget Report showed that public spending is to rise more slowly than the rate of economic growth between 2006-07 – when the Government will spend 42.9 per cent of GDP – and 2010-11, when it will spend 42.2 per cent of GDP.

 

§         NB the reduction in the growth performance this year means that the fall in the spending-to-GDP ratio over this Parliament is higher in the Pre-Budget Report than in this year’s Budget.

 

 

TOTAL MANAGED EXPENDITURE (TME) AS A PERCENTAGE OF GDP

 

 

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

TME as a percentage of GDP – 2005 Pre-Budget Report

42.4

42.9

42.8

42.4

42.3

42.2

TME as a percentage of GDP – 2005 Budget

41.8

42.2

42.4

42.2

42.1

Sources: Table B10, Pre-Budget Report 2005, HMT; Table C5, Budget 2005, HMT

 

Conclusion

 

§         The implication of the Chancellor’s words is that the only way to improve public services is to increase spending at or above the Government’s plans.  This cannot be right given that so much of the extra spending since 1999-00 has made little improvement to the quality of services.   Speaking this morning, Edward Leigh MP, chairman of the House of Commons Public Accounts Committee, said: “If one lesson stands out from the work of the Public Accounts Committee over the years, it is that government departments are masters at spending public money but often far less proficient at ensuring that this translates into better public services.”

 

§         Public spending discipline allied to structural reform is needed to reduce waste and improve the performance of public services.  The Government has bravely pushed ahead with reform in the NHS – based on some private sector delivery and patient choice – but the reforms remain fragile and uncertain.  The education White Paper is only the smallest step in the direction of reform.  The progress of reform in welfare and home affairs will be set by the forthcoming White Papers in those areas.

 

§         Gordon Brown’s attack is disingenuous given that he will, in effect, follow a Growth Rule himself throughout this Parliament.  The public spending discipline in the rest of this Parliament is likely to expose the lack of reform up to now.

 

 

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