George Kerevan: Fiscal pain is the real result of budget battleground

Published on Tuesday 16 June 2009 21:30

PUBLIC spending is going to be the battleground on which the next general election is fought.

The Prime Minister says: "The choice whenever it comes is between a government that is prepared to invest in the future and a Conservative Party that is going to cut."

Yet the Tories say they are going to adhere to Alistair Darling's spending plans until 2014 (just as Gordon Brown adopted Ken Clarke's budget after the 1997 election). That has not stopped Andrew Lansley, the Tory shadow health secretary, from claiming that some departmental budgets will have to be slashed by 10 per cent if the NHS is to be protected from cuts.

Let's try and navigate through the hyperbole, to find out what the public spending situation actually is, taking Alistair Darling's 2009 Budget as our map.

Current government expenditure is slated to grow in cash terms from 608 billion this financial year, to 712bn in 2013-14 (Budget 2009, page 226). This is how Brown is able to claim the government is increasing spending.

But rising government cash expenditure is the norm, due to bureaucratic inertia. In fact, public spending in cash terms has risen every year since 1947, when the end of the war allowed a big, one-off cut in military spending. The more important issues are (i) what does inflation do to real spending; and (ii) where does the money go?

The Budget reduced the forecast for annual real growth (i.e. after inflation) in current spending to only 0.7 per cent, after April 2011. Even if we take this at face value, that's nowhere near enough to cover the rise in interest payments on the ballooning national debt. But if the huge expansion of the money supply caused by the Bank of England's "quantitative easing" programme pushes inflation higher than the Treasury's optimistic low estimation, then you can say goodbye to any real increase in the current spending envelope.

This is small beer when you consider that annual interest payments on government debt are likely to surge by over 8 per cent each year (according to the Institute of Fiscal Studies). That means government departments will be facing an annual 2 per cent cut in real spending over the period to 2013-14.

Add in increases in social security payments caused by rising unemployment and the IFS thinks departments will have to plan for an average 7 per cent cut in real terms in their budgets, between 2011-12 and 2013-14. If you want to protect NHS funding, then other departments can expect a cut more like 10 per cent over three years – hence Lansley's point. (By the way, included in these "departments" is the Scottish Government, so Holyrood has big cuts coming its way.)

The Westminster government can take refuge in the fact it has not published departmental spending plans for these years and will doubtless try and avoid doing so before the election.

The one big cut we do know about is in capital spending (Budget report, page 226). For this financial year, the government's gross capital spending is pencilled in at 63bn. It is scheduled to fall in cash terms (net of asset sales) every year till 2013-14, when it will be down to 46bn. That's a 27 per cent cut in cash terms. If you add in depreciation, it's more like a 50 per cent cut. How is that "growing the economy out of recession"?

This means more lean years for the construction industry and more potholes in the road. It is also difficult to see how the MoD will be able to afford a replacement for Trident.

The Chancellor's tax projections also make interesting reading (Budget public finances supplement, page 40).

In 2007-8, the last year of the boom, net taxes and National Insurance Contributions brought in 515.9bn for the Treasury. This total has plummeted by more that 50bn with the recession. But the Treasury is forecasting revenues in 2013-14 will be back up to 616.5bn – a whopping 100bn more than at the top of the boom, when banks and house buyers were stuffing pound notes in Darling's wallet. Even with budget cuts, the Chancellor is planning to increase tax revenues by a fifth over their boom-time peak. If he fails, I don't see he can borrow his way out of trouble.

Where is this money going to come from?

The Budget papers predict that stamp duty will be bringing in 13.1bn in 2013-14, only a touch lower than the 14.1bn raised in 2007-8, when the housing market was at its peak. Either this estimate is moonshine or the Treasury thinks there is going to be another house price boom.

More sensibly, the Treasury thinks that corporation tax receipts will flatline till 2013-14, though that contradicts its optimistic economic growth forecasts. The big tax hike is in NICs, which are predicted to rise from 100.4bn in 2007-08 to 126bn in 2013-14, a jump of over a quarter. As NICs are a tax on employment, this does not bode well for the labour market.

The bottom line is that we are in for two parliaments of fiscal pain. It might be better to discuss the matter sensibly.