PO
LITICS AND BUDGET SPECIAL
P newstatesman l 27 March
2006 l features
OLITICS
AND BUDGET SPECIAL
POLITICS AND BUDGET SPECIAL
Bold visions, but where’s the cash?
Gordon Brown’s worst
nightmare is to
be seen as a Chancellor who has
run out of steam. In his tenth Budget,
his ambitions for public spending and
investment are as lofty as ever. His most
far-reaching new target is to bring spending
per pupil at state schools up to the level of
private education. How are such bold visions
still possible at a time when, according to
any analyst you care to talk to, he has in
effect run out of new money?
In practice, the spending spree of the
past six years is all but over. The coming
financial year will be the last in which total
public spending grows faster than GDP.
As spending levels off, there will be plenty
of unfinished business that cannot be
completed without further resources,
whatever the rhetoric about efficiency
savings. The new target for education
spending is described as a “long-term aim”,
which would presumably be achieved only
when budgets allow.
The lack of new resources will put at
risk
some of Brown’s most ambitious existing
targets. The ending of child poverty by 2020
requires not just a continuation but a
stepping up of his generosity to date.
Figures earlier this month showed that he
had narrowly missed a first milestone of
reducing child poverty by a quarter, despite
the billions poured into tax credits. More
importantly, on present policies he will fall
well short of the next target: halving child
poverty by 2010. This is because it has
become progressively harder to get
workless families into jobs: most of those
remaining out of work have a child under five
or an adult with a disability.
This week Brown pledged to sustain for
another three years the current policy of
raising tax credits for poor families with
children, to keep pace with earnings. The
trouble is that he is also sustaining the policy
of raising benefits for these same families
only in line with prices. With benefit income
worsening relative to the average, tax
credits would need to rise even faster than at
present in order to get relative poverty down.
Another Brown favourite, health
spending,
will continue to expand rapidly for at least
two years, until the end of the present
spending period. But thereafter it will be
competing for scarce cash with education,
which has been given a new priority in this
Budget. Next year’s spending review will
have to decide to what extent overall health
spending can continue to grow. It will by then
have increased from less than 6 per cent
to nearly 8 per cent of GDP. This would
have fulfilled the pledge made in 2000 to
raise health spending to the EU average by
2006, were it not for the fact that other EU
countries are also spending more. In an
ageing society with ever more expensive
treatments available, the Chancellor needs
to run to stand still. This week’s suggestion
that the answer is to treat more people
outside hospital may help at the margins, but
will not stem the tide of growing demand.
The message in Whitehall that there is
no
new money also affects some crucial
spending areas that the government has so
far shied away from, but where pressures
are growing. In the week to come, a report
by Sir Derek Wanless will warn that planned
funding of long-term care for the elderly is
wholly inadequate in the light of future need.
The Joseph Rowntree Foundation has
pointed to serious gaps already opening up
in care provision. But the Treasury will be
hard put to find even the modest amounts of
extra money needed to plug these gaps
today, let alone plan properly for the future.
An even bigger pressure will be to
respond
to the Turner report on pensions and in
particular its recommendation that public
pensions keep pace with earnings. This kind
of change cannot be funded in the largely
ad hoc approach to revenue-raising that
has served Gordon Brown well to date.
For example, he has been able to take more
proportionately from higher-rate taxpayers
by not raising tax thresholds in line with their
burgeoning earnings. Green taxes such as
the road tax on gas-guzzlers are designed
to signal Brown’s green credentials rather
than raise big money. The cash from these
sticks was almost entirely given back in
carrots for green behaviour.
Slower growth means that such
opportunistic measures may only just be
enough to avoid big public spending cuts in
the years ahead. To meet new needs, a
more systematic approach to raising new
money is required. One day, a future
chancellor may even dare to utter a phrase
last pronounced by Denis Healey in 1975:
“The basic rate of income tax will rise…” .