Sunday, 28 June 2009

The public expenditure debate

Public expenditure looks like being one of the major dividing lines between the political parties at the next election. It is, of course, to some extent an artificial debate. Whoever is in office is going to make substantial cuts, probably the most severe since 1945. However, the preference of the Conservatives would be to cut more and increase taxes less and the cuts would probably be directed differently under Labour.

How much has to be cut depends in part on how quickly the economy recovers, boosting tax revenues and reducing benefit payments. There has been some over optimism about recovery when what has happened is that the economy has stopped declining rapidly and is bumping along the bottom. To some extent there has been an inventory cycle effect as stocks that have been run down have had to be replenished.

It is therefore worth noting the OECD forecast of a 4.3 per cent in GDP this year, followed by a flat 2010. Three per cent of output may have been wiped out for ever in OECD countries and perhaps as much as five per cent in the UK.

The required spending cuts will include savage cuts in capital spending and a reduction in public sector manpower. But where will the cuts fall? If reductions are equally shared. departmental spending would fall by nearly 7 per cent in real term in the three years after 2011. If health and overseas aid are spared, most departments would fall by 10 per cent and if schools escape the axe, the reduction would be a massive 13.5 per cent.

Health, education and social security account for about £2 out of £3 spent in the form of public expenditure in the UK? Can these budgets remain sacrosant? Health is beset by the problems of an ageing population and an ever advancing technological frontier. Touching the NHS budget is regarded as political dynamite. However, perhaps there needs to be a debate about what can be afford or whether there is any scope for charging (although that may not raise much in relation to the controversy it would cause).

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