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**0S D O C U M E N T IS T H E P R O P E R T Y O F H E R B R I T A N N I C M A J E S T Y ' * G O V E R N M E N T
COPY NO
CP(76) 42
81
2 J u l y 1976
CABINET
P U B L I C E X P E N D I T U R E 1977-78 - T H E ECONOMIC BACKGROUND
M e m o r a n d u m b y t h e C h a n c e l l o r of t h e E x c h e q u e r
1.
In o u r l a s t Public E x p e n d i t u r e White P a p e r ( C m n d 6393) which w e
p u b l i s h e d i n F e b r u a r y 1976, w e s a i d ( p a r a g r a p h 31) ­
"While the G o v e r n m e n t r e c o g n i s e the need for spending authorities
t o p l a n ahead on a s f i r m a b a s e a s p r a c t i c a b l e , t h e u n c e r t a i n t i e s in
t h e p r o s p e c t s for the economy and for world t r a d e and payments
r u l e out a f i r m c o m m i t m e n t t o e x p e n d i t u r e p l a n s .
The
G o v e r n m e n t will t h e r e f o r e be r e a d y to modify and adapt t h e s e plans
a s t h e g e n e r a l c o u r s e of t h e e c o n o m y a n d t h e m o s t i m p o r t a n t n e e d s
of t h e c o m m u n i t y r e q u i r e " ,
THE PROSPECTS AHEAD
2.
T h e p r o s p e c t s had a l r e a d y changed when on 5 M a r c h I c i r c u l a t e d
m y M e m o r a n d u m on the Economic Background to the Public Expenditure
S u r v e y 1976 (C(76) 2 5 ) .
At that t i m e the T r e a s u r y e c o n o m i s t s estimated
that "the world r e c e s s i o n h a s b e e n d e e p e r and m o r e prolonged and the
upturn so far m o r e sluggish than we had reckoned on".
Moreover, they
a s s u m e d o n l y 2 p e r c e n t g r o w t h i n 1976.
I was criticised at the time for
b a s i n g t h e h o p e d of B r i t i s h r e c o v e r y t o o m u c h o n t h e p a c e of r e c o v e r y i n
t h e r e s t of t h e w o r l d .
3.
A t t h e b e g i n n i n g of J u l y t h e p i c t u r e h a s c h a n g e d a g a i n .
In f a c t , the
p a c e of w o r l d r e c o v e r y h a s t u r n e d o u t t o b e f a s t e r , n o t s l o w e r , t h a n w e
expected when we d r e w u p the last Whtte P a p e r .
And the big i m p r o v e m e n t
i n o u r c o m p e t i t i v i t y i m p l i e d b y t h e 12 p e r c e n t d e p r e c i a t i o n c o m b i n e d w i t h
t h e 4 £ p e r c e n t p a y l i m i t h a s s u b s t a n t i a l l y i n c r e a s e d o u r c h a n c e of b u i l d i n g
our r e c o v e r y on e x p o r t s and import substitution.
Moreover, our G r o s s
D o m e s t i c P r o d u c t (GDP) h a s r i s e n so far t h i s y e a r at 1 p e r c e n t a q u a r t e r ,
a n d i t w o u l d b e r e a s o n a b l e t o a s s u m e 4 p e r c e n t g r o w t h f o r 1976 a s a w h o l e .
On t h e o t h e r h a n d , c o m m o d i t y p r i c e s h a v e r i s e n i n r e c e n t m o n t h s m o r e
s h a r p l y t h a n w e e x p e c t e d a n d , if t h e t r a d i t i o n a l J - c u r v e a p p l i e s , o u r
c u r r e n t a c c o u n t d e f i c i t o n t h e b a l a n c e of p a y m e n t s m a y d e t e r i o r a t e
significantly later t h i s y e a r .
4,
The main implications of these changes in D U X economic prospects
are as follows:­
a.
The demands made on our manufacturing industry for
exports and import substitution are likely to require an
exceptionally rapid growth of output In 1977 which, if it is to be
sustained, m a y need a parallel increase in productive capacity
through acceleration of investment unless growth is to be
frustrated by supply bottlenecks and overheating.
b.
The great improvement we have achieved in Industrial
relations over the last 18 months should mean that the flow of
industrial supplies is likely to be much less subject to interruption
than It was in the last two periods of upturn.
c.
This is the problem to which the International Monetary
Fund (IMF) in their recent consultations with us drew special
attention: the need to ensure that scope its available in 1977 for the
continued development of export-led growth and expansion of
industrial output through investment. Their judgment was that the
presently planned levels of net public sector demand on real
resources would prove to be excessive in 1977, and, on the
alternative monetary analysis, we would be driven into
dangerously inflationary monetary financing, with damaging effects
on both domestic prices and the external balance of payments.
d.
It is likely In any case that we shall face substantial deflefts
on current account of the balance of payments during the next two
years. Since our reserves are now low, we shall have to finance
these deficits by borrowing abroad. Most of the foreign
Governments which have the money to lend are likely to insist either
that we draw the remaining IMF credit tranches; or that we accept
the conditions which the I M F would undoubtedly insist on; namely,
a specified reduction in our Public Sector Borrowing Requirement
(PSBR) representing net public sector demand on the economy, with
particular importance being attached to the financial year 1977-78,
in order to make room for continued industrial recovery,
particularly In exporting and Import-substituting industries, without
running into severe inflation.
FINANCING T H E P S B R
5.
W e have rightly done our best to limit unemployment during the
years of recession by accepting a large PSBR. So far we have been able to
finance our PSBR without refuelling Inflation because Industry has not been
borrowing and the private citizen has been saving a higher proportion of his
earnings than ever before. Thus, In spite of an unprecedented P S B R we
have kept the money supply under control. It rose only 8 per cent in 1975
compared with 28 per cent in 1973. On the other hand, the accumulation
of debt imposed by our borrowing requires very heavy payments of interest
in the coming years; that in itself imposes a limit on our scope for public
expenditure in other fields.
6,
N o w that the economy is recovering we must aim steadily to reduce
our PSBR. Business must be in a position to borrow more for investment,
Btockbuilding and increased working capital as recovery proceeds; and
private saving is likely to fall as inflation and unemployment fall. It will,
therefore, be difficult to finance a large PSBR except by driving interest
rates to levels at which industry cannot afford to borrow, thus choking off
the investment on which sustained growth will depend and without which
there Is no hope of reducing unemployment to acceptable levels.
7
7.
The only alternative would be to print money as the Conservative
Government did In 1972 and 1973, with consequences for Inflation from
which we are still suffering. Indeed, the present prospect Is that the growth
of the money supply, which has been fairly stable over the past two years,
will be accelerating later this year. In 1977, with unchanged policies, it
m a y be growing at a rate faBter than the national income. H no action
were taken to rein back the growth of money we would create an excess of
liquidity which would add to our difficulties. Our efforts to bring down the
rate of inflation and maintain the expansion of the economy would be at risk.
Moreover the excessive growth of money supply could rapidly spill over into
external capital flows and seriously increase our difficultiee in managing the
sterling exchange rate.
8.
The conclusion therefore must be that, to maintain firm control over
the growth of money supply and at the same time ensure that industry can
finance itself, we need a substantial fall in the public sector deficit in 1977.
W e have already committed ourselves to taking such action, if necessary,
in the White Paper just published - "The Attack on Inflationr The Second
Year" (Cmnd 6507) - when we said in paragraph 31 r*
"In addition to exercising firm control of public expenditure, the
Government are determined to see to it that the money supply does
not grow too rapidly: the Chancellor of the Exchequer has said he
will ensure that the growth of the money supply is consistent with the
Government^ plans for the growth of demand expressed in current
prices. The Government are equally determined that the expansion
of productive capacity and exports should not be held back by
competing public sector demands for finance. These policies will
be reinforced if necessary by further action in the fiscal and
monetary fields".
9.
Other countries are planning rapid returns towards fiscal balance.
France intend * to eliminate its budget deficit in 1977, In the United States,
the Federal deficit J* likely to be reduced by at least 25 per cent in the next
financial year - and by more if President Ford gets his way. The
Germans have published a medium-term plan for a reduction of two-thirds
in their deficit by 1979.
10.
Our strategy has been to move progressively over three to four
years towards eliminating the balance of payments deficit and restoring full
employment. As I explained when we considered our expenditure plans
last year, there would also have to be a progressive reduction In the public
sector deficit,
11.
I said then that a deficit at the current level (about 10 per cent of
G D P in 1976-77) "Is not consistent with balance of payments equilibrium
unless the other two sectors of the economy are willing to oave in excess of
their capital expenditure far greater proportions of their incomes than they
have ever done in the past. There is no reason to expect such a major
change in habits ... If the Government persisted In raising insufficient
taxation to pay for the resources it was extracting from the economy, the
other sectors would one way or another be left with excessive income
which they would be likely to spend and would in turn absorb resources from
the rest of the world, Jtt therefore follows that if we are to remove our
balance of payments deficit over a ran of years to make room for the extra
exports required we must reduce the excess of public spending over public
sector revenue" (C(75) 62),
12.
While we were in the depths of the recession we could not make a
start on reducing the PSBR but the worst of the recession is now clearly
past and the time has come, as we always expected it would, to begin. A s
a very rough guide we should be aiming to reduce the P S B R to about 4 per
cent of G D P over three to four years, ie by an average of about
£2 billion a year at present prices.
13,
A part of the Improvement required In the P S B R will come about
automatically as recovery proceeds and the Government gets more
revenue and pays out fewer benefits. But since employment lags behind
output the benefit of this next year will be small, and the bulk of any
improvement in the P S B R must come from fiscal action on tax or
expenditure cuts,
T H E C A S E AGAINST T A X INCREASES N E X T Y E A R
14.
To cut the P S B R in 1977-78 by, say, £1, 000 million through
increases In income tax would mean increasing the basic rate by 3p,
involving a cut tn take-home pay for a single person earning £60 a week of
£1.38, for a married couple on the same earnings of £1,17 and for a couple
with two children of 90p.
To out t h e PSBR b y £L000 million b y indirect
taxation w o u l d mean u n i f y i n g the V a l u e A d d e d T a x rate a t 1 2 $ p e r cent plus
i n c r e a s e s In t h e d u t i e s on d r i n k , t o b a c c o or p e t r o l , w h i c h w o u l d t o g e t h e r
These cuts in real
i n c r e a s e the R e t a i l P r i c e Index b y 2 1 - 2 $ p e r cent.
t a k e - h o m e p a y w o u l d c o m e t o w a r d s t h e e n d of a y e a r w h e n ft h a d a l r e a d y
f a l l e n b y 3-4 p e r c e n t .
15.
T h u s I d o not b e l i e v e i t w o u l d m a k e s e n s e t o p l a n o n l a r g e
i n c r e a s e s In d i r e c t o r i n d i r e c t t a x a t i o n n e x t A p r i l s i n c e b o t h w o u l d c a u s e
a n i m m e d i a t e f a l l i n r e a l t a k e - h o m e p a y i n t h e m i d d l e of a p a y r o u n d i n
which t h e unions a c c e p t e d a n exceptionally low and s t r i c t p a y l i m i t in r e t u r n
for tax cats.
M o r e o v e r n e x t A p r i l m a y w e l l f a l l i n t h e m i d d l e of o u r
n e g o t i a t i o n s c o n c e r n i n g p a y p o l i c y i n t h e following r o u n d .
A collapse in our
pay polity would do u s i r r e p a r a b l e h a r m a t that t i m e .
16.
K, on t h e other h a n d , w e sought to r e d u c e t h e deficit t h r o u g h big
i n c r e a s e s In c o m p a n y t a x a t i o n , w e would f r u s t r a t e t h e i n d u s t r i a l
F o r t h e s e r e a s o n s , public
investment on which sustained growth depends.
expenditure m u s t m a k e a major contribution t o the n e c e s s a r y adduction in
n e x t y e a r ' 9 P S B R b y r e d u c i n g p u b l i c c o n s u m p t i o n of g o o d s a n d s e r v i c e s .
THE SIZE AND TIMING O F C U T S I N PUBLIC E X P E N D I T U R E
17.
Ih m y j u d g m e n t we should a i m a t public e x p e n d i t u r e s a v i n g s leading
t o a r e d u c t i o n i n t h e P S B R of £ 1 b i l l i o n .
We would b e w i s e t o link t h i s
r e d u c t i o n w i t h a s t a t e m e n t of o u r o b j e c t i v e s f o r t h e P S B R i n 1 9 7 7 - 7 8 a n d
with m e a s u r e s t o c o n t r o l t h e m o n e y supply and t o r e d u c e e x c e s s liquidity.
On t h e o t h e r h a n d t o p u b l i s h a c c e p t a b l e o b j e c t i v e s f o r t h e P S B R o r t o s e t
l i m i t s f o r t h e g r o w t h of t h e m o n e y s u p p l y w i t h o u t s i m u l t a n e o u s l y t a k i n g
s t e p s t o achieve t h e s e objectives would c a r r y conviction with n o - o n e .
18.
H, however, reductions In expenditure a r e to b e c a r r i e d through In
an orderly way, the m o r e notice the better.
Unless we take decisions to
r e d u c e p u b l i c e x p e n d i t u r e In 1977-78 i n t h e n e a r f u t u r e , w e s h a l l b e left
with no a l t e r n a t i v e e x c e p t swingeing I n c r e a s e s In taxation a t t h e w o r s t
possible m o m e n t for our incomes policy.
19.
T h e r e a r e , in m y view, overriding arguments for seeking to take and
publish o u r d e c i s i o n s on public expenditure r e d u c t i o n s before the House
rise8 for the Recess.
O t h e r w i s e w e would h a v e t o r e c a l l t h e House during
I d o n o t t h i n k w e c a n s a f e l y waft t h a t
the R e c e s s o r wait until November.
long.
T h e r e h a s b e e n significant p r e s s u r e on t h e sterling r a t e , e v e n since
we announced t h e $ 5 . 3 billion standby c r e d i t .
20.
If w e r i s e f o r t h e R e c e s s w i t h o u t m a k i n g s u c h a n a n n o u n c e m e n t t h e
p r e s s u r e on sterling i s likely to r e s u m e and we m a y face a choice between
letting t h e r a t e c o l l a p s e , with unacceptable c o n s e q u e n c e s f o r inflation and
for our agreement with the Trades Union Congress, or spending the whole
of the standby credit without any assurance it will be sufficient to hold the
rate for long. In that case we would be forced to the IMF in a crisis in
which our ability to negotiate acceptable terms for further drawings was
very weak. Moreover, our remaining credit with the I M F is only for
$3,800 million - far less than ie required to repay the $5.3 billion standby
credit, still less to finance the external deficits we expect over the next
few years.
21,
For all these reasons I believe that we should decide, and announce
before the Rocese, reductions in public expenditure for 1977-78 designed to
reduce the borrowing requirement by about £ 1 billion. To achieve this In
full would require cuts amounting to about £1* billion. This I s equivalent
to a general cut of 2j per cent in programmes - a very difficult task when
w e are far from being able to guarantee that the limits set by the last White
Paper will be adhered to. But the threat to our economic strategy for
sustained growth and a return to full employment will be far greater If we
fail to make these reductions.
CONCLUSIONS
22,
I therefore propose that we should take the enclosed memorandum
by the Chief Secretary, Treasury, as a basis for decisions which will
achieve the reductins in public expenditure in 1977-78 which I have
described.
D W H
Treasury Chambsrc
2 July 1976
PUBLIC EXPENDITURE - THE 1 9 7 6 SURVEY
Memorandum by the Chief Secretary, Treasury.
1.
The plan which we announced in our last Public Expenditure White
Paper was that (apart from debt interest) the total would continue to
rise in 1 9 7 6 - 7 7 ,
but that, in the following years, it would be
stabilised at about the level projected for 1 9 7 6 - 7 7 .
This meant that
the previously planned increases in most programmes had to be scaled
down,
up to that point public expenditure had increased by 2 0 per cent
in real terms since 1 9 7 2 . while our national output had risen by only
2 per cent.
The object of our medium-term strategy was, by stabilising
the level of resources allocated to public expenditure, to make as much
a
s possible o f o u r annual growth in wealth available for industrial
growth, for closing the balance of payments gap, and for some increase
in r al take-home pay.
e
we now have to review our public expenditure plans up to 1 9 7 9 - 8 0 ,
2.
a
nd to bring into account a further year ahead, 1980-81.
As background
"laterial the usual report of the Public Expenditure Survey Committee has
been circulated.
In addition, I enclose a Treasury Report, which draws
0
n that material, and sets out to present the salient figures and issues,
a
s a basis for our policy decisions without itself making any policy
^ecofnmen da t io n s.
3
.
The planning and control of public expenditure involves both the
decisions which we take following each year's medium-term survey;
the
decisions -taken during the year in between surveys; and the implementation
Q
f those decisions.
The new system of cash limits, the new financial
^formation system for central Government expenditure, and the improved
systems of returns for expenditure by the local authorities and
na
ti nalised industries, all these are relevant to the carrying out of
0
0 u r
a n
plans during the year.
The development of the contingency reserve as
operational arrangement is important in relating our new decisions
during the year to the planned total.
4.
We have resisted great pressure, domestic and international, to cut
planned expenditure for the current year, but we have renewed our
commitment that the contingency reserve for 1976-77 will not be exceeded.
The enclosed report suggests that the current year's problem should
continue to be dealt with on the basis of periodical progress reports
to Cabinet, and that the new decisions to be taken on the basis of the
1976 survey should be related to future years. I accept this, but I must
make it clear that, although I believe that it will be possible to keep
without our planned total for 1976-77, this will require the utmost
restraint in restricting hew claims unless they can be matched by
offsetting savings, to those of the very highest priority and even these
will have to be limited in amount.
Euture Years
5.
As regards future years, the Treasury report poses questions of
Procedure or method, on which I should like to comment, first, and
Questions of substance, to which I will come presently. The system of
medium-term planning of public sector prograran.es, which necessarily
has to be carried out mainly in volume terms rather than by forecasting
"fcney totals 4 or 5 years ahead - a system which has been developed on
the basis of the Plowden report of 1961 - has been increasingly questioned
nd some critics see it as a factor in what they regard as the excessive
Srowth of public expenditure. I am sure that there has been a great deal
room for improvement in the workings of the system - I have already
Mentioned some of the improvements which we have made - but we have made
*t clear to the Expenditure Committee that we should regard it as a
^trograde step to abandon medium-term planning. However, I do think that
d e r the Tories, the system was a factor in their mismanagement of the
conomy through encouraging them to concentrate their attention on the
relatively distant future while the short-term situation was getting out
a
o f
Un
e
control.
The report poses the question whether, so long as we are sticking to
egy which we so painfully hammered out before the
t White paper, the emphasis should now be put on the implementation
the strategy over the next year or two. I do not think that in this
respect we can lay down rules which will hold good for every survey. On
a future occasion, without losing sight of the short-term situation, we may
mil wish to redefine our medium-term objectives. But in the present
Situation I see a strong case for reverting, as the report puts it, to the
earlier practice of taking firm decisions for one year ahead and near-firm
decisions for a further year after that, where this is necessary, while
Adhering for the time being as closely as possible to the programme levels
for subsequent years. In this way we should neither pre-empt hoped-for
future growth before it becomes a real prospect, as so often happened in
the past, nor risk mortgaging the whole benefits of North Sea oil through
a continuing accumulation of debt; but at the same time we should not
Commit ourselves to cuts in future programmes which should be unnecessary
if we manage our affairs well in the meanwhile, nor do we forego the option
of framing plans for further improvements when we have achieved success
in our policies.
1377-78
7. Paragraphs 7 to 10 of the report summarise the figures in the 1976
survey. Both for 1977-78 and 1978-79 the total of the programmes in the
survey, drawn up in accordance with the approved ground rules, is closely
in line with the corresponding White Paper total - all the figures are in
the range £53-54- billion - and we have a contingency reserve for the first
and second years ahead of the same size as we had for the corresponding
y*a,rs in the last White Paper. But these figures do not allow for any of
the additional bids which have been tabled and which add up to about
£llj billion in each year. The report poses the question whether we should
new set out to keep to the White Paper planned totals for programmes plus
contingency reserve, or to plan now to exceed or reduce these totals.
8. It is quite clear that there can be no question of exceeding the
"hite Paper total: a decision to do so could well precipitate a renewed
unmanageable sterling crisis. The implication of this is that, at the
*ry least, the Ministers concerned should rearrange their programmes so
* to eliminate or offset the additional bids of £1.6 billion for 1977-78,
nd I propose that this should be our initial decision.
v
a
a
9.
As regards possible net reductions in 1977-78, I have approached this
in terms of feasibility, and I have myself carefully gone through each
programme to form a preliminary judgement of what reductions would be
administratively and technically feasible, without much addition-to the
legislative programme for such new measures -
as
distinct
legislation needed to carry out earlier decisions.
from
any
This does not mean that
1
we will want to adopt measures purely because they are feasible, but
\
rather that we must rule out those which are not.
'
10.
The social security programme poses a major problem.
It is the
largest single expenditure block of all and, because of changes in
demographic factors and economic assumptions, an increase above the White
Paper figures is likely unless offsetting savings are made.
But there is
relatively little scope for savings unless we are prepared to modify our
statutory commitment to annual uprating of benefits in line with prices
or earnings as the case may be.
Sizeable savings would be possible in
unemployment and certain other benefits, without going back on this
commitment, but these too would
introduction of new conditions.
require either legislation or the
The one possible saving which does not
encounter any of these difficulties would be the postponement of non­
contributory invalidity pensions for housewives involving about £ 2 0
million
in 1977-78.
11.
On the basis of this appraisal, the greatest scope for new savings
without legislation is to be found in housing expenditure other than on
subsidies.
Like social security, this programme is running at a much
higher level than a few years ago, but it is one in which there are some
large items which could be cut back quite quickly.
To the extent that we
Exclude social security from the scope of this exercise, the more we will
be obliged to look towards the housing programme.
I do not want to comment in this paper on every single programme,
though I should be prepared to give further reasons in discussion for
%
assessment of what is feasible, but some comment
is called for on
the programmes of capital expenditure by the nationalised industries and
of support for industry generally.
w
e are committed to giving priority
to support for the manufacturing industry.
Nevertheless this expenditure
must be kept under tight control and must be strictly related to effective
projects and programmes. Some net saving from this whole area would, in
my view, be feasible, but at the most, taking these programmes together,
I do not think that we should contemplate any increase above the totals
in last year's White Paper.
13. The Treasury report discusses the special problem
of
local
authority
current expenditure. There has been an actual overspend in 1975-76 of
some £150 million, and there is a likely overspend in 1976-77 of up to
£200 million. We have already said that rate support grant for 1977-78
will be related to the White paper programmes, and that local authorities
must cut back their expenditure plans to those levels. This will require
an absolute cut in 1977-78 in programmes over which we have no direct
control. The question is whether we should be prepared to restrict rate
support grant still further, and ask for a corresponding scaling down of
local authority spending plans. If we did so, no doubt some of the local
authorities would comply, in which case, since such a large proportion of
the expenditure is on education, the teachers would be likely to be further
affected. Other local authorities probably would not comply, so that the
cut in grant
would be matched by a rise in rates.
H. In the enclosed list I have brought together my estimates of the
Ireductionswhich would be feasible in each of the 15 survey programmes
in 1977-78* without bringing in any fresh savings on social security
or local authority current expenditure. The resulting total is about
£1.5 billion. Only two of these measures, involving food subsidies
and some health service charges, would affect prices; this would be
unwelcome, but the RPI effect would be little more than Hjg, TO the extent
that we maintain or increase subsidies at the expense of other expenditure,
we affect the level and standard of essential services, and we are also
likely to affect employment in the public services. There are, however,
tone transfer payments, such as mortgage lending by local authorities and
various of the grants to industry, where action could be taken without
affecting prices or directly affecting employment.
t 5 . As regards the programmes for 1978-79, in some cases it would be
appropriate to carry through the cuts or postponements on a provisional
basis, to be confirmed or reversed in the next survey. In some mother
cases the economies might be possible only on a once-for-all basis. In
any event the essence of the approach would be to make a special once­
for-aii effort to give the best possible chance for export-led growth.
The detailed consequential both for 1978-79 and subsequent years would
have to be worked out in the light of our decisions on 1977-78. Although
the additional bids for the later years would have to be held back at
this stage, the existing programmes beyond 1978-79 need not necessarily
be affected, except to the extent needed to secure a workable progression,
but naturally we should have to consider any special cases where new
decisions affecting the later years could not be put off.
16. I have tried to set out in this paper some of the practical problems
that will have to be faced if we are to make savings of £1 billion in the
Previously planned programmes for 1977-78.
I have deliberately kept
detailed commentary to a minimum at this stage, but the list at the Annex
of what I have called "feasible reductions" speaks for itself as far as
the nature of the problem is concerned. My broad conclusion is that net
"vlng. on survey programmes of the order of £1 billion, after offsetting
or eliminating additional bids, would be feasible, though they would
Evolve a number of unpalatable measures. If we wished at the same time
t* reinforce the contingency reserve for 1977-78, so as to give us more
room for manoeuvre when the time comes, correspondingly greater reductions
*0uld be needed now,
i explain at paragraph 9 that when I refer to "feasible reductions",
refer only to what I believe to be technically and administratively
o*eible. There will no doubt be differing views on the political
feasibility of ft number of the Items, and certainly none are easy. It is
however my view that if Cabinet decides to make net savings of £1 billion
in 1977.78, they will have to be found from the list in the Annex. The
^eciBiQuB required would include the following:­
1
f
(1)
Whether the reductions are to be Secured from among those set
out in the enclosed list, including a substantial reduction in
housing expenditure.
(ii)
W h e t h e r the s o c i a l s e c u r i t y p r o g r a m m e
largely
a substantial
degree
Whether w e confine
expenditure
(v)
or
exempt.
( i i i ) W h e t h e r a n y of the o t h e r p r o g r a m m e s
(iv)
is to be w h o l l y
of r e l a t i v e
our objective
in 1977-78
on l o c a l a u t h o r i t y
the r e d u c t i o n s
to k e e p
to the W h i t e
Whether
there a r e a n y f u r t h e r p o s s i b l e
programmes w h i c h we should
a r e to be g i v e n
priority.
to s e c u r i n g
paper
listed
current
necessary
figures.
consider.
savings
in p a r t i c u l a r
ANNEX
S E C E E
I
FEASIBLE NET EXPENDITURE REDUCTIONS IN 1977-78
(EXCLUDING SOCIAL SECURITY AND LOCAL AUTHORITY CURRENT EXPENDITURE)
( £ m i l l i o n a t 1976 Surveyprices)
amrae
F e a s i b l e net
reduction
I
s
legislation .
needed
Measures r e q u i r e d o t h e r
than l e g i s l a t i o n
Defence
140
No
Mainly by d e f e r r a l s .
^id programme
100
No
Limit new commitments.
225
No
Phase out food s u b s i d i e s
more q u i c k l y ; save £25 m i l l i o n
on a g r i c u l t u r a l g r a n t s .
140
No
Delay payment of r e g i o n a l
development g r a n t s .
Equalise r a t e s of r e g i o n a l
employment premium f o r men and
women a t £2 a week.
N e g o t i a t e change i n scheme of
refinance f o r export c r e d i t s t o
eliminate additional bid.
Agriculture
^ d e , industry
and employment
50
Order
required
No
No
Gross s a v i n g s of £305 m i l l i o n
required t o o f f s e t a d d i t i o n a l b i d s
of £260 m i l l i o n f o r BNOC and £45
m i l l i o n for other i n d u s t r i e s .
The s a v i n g s would i n v o l v e treating
£95 m i l l i o n uncommitted BNOC
expenditure a s an u n r e s o l v e d claim
on the contingency r e s e r v e .
100
No
No new s t a r t s f o r c e n t r a l or
l o c a l government roads f o r 12
months.
400
No
130
Xes
Reduce expenditure on mortgage
l e n d i n g , m u n i c i p a l i s a t i o n , housing
associations, new towns e t c ; control
l e v e l of c o u n c i l house b u i l d i n g Abolish improvement g r a n t s t o the
private sector.
100
No
^Uonalised
JJdustries
Vestment
*oad
8
^ronmental
Reductions i n l o c a l a u t h o r i t y
c a p i t a l p r o j e c t s ; postpone some
c a p i t a l expenditure by water
a u t h o r i t i e s ; postpone some
community land purchases
n i m at 1976
amme
3
legislation
needed
Measures required other
than legislation
5 Law, order
and
protective
services
15
No
Moratorium on capital projects.
Educat ion
80
No
Science and.
the arts
10
Mainly cuts in building projects
and university expenditure.
No
Health and
personal
Bocial
services
70
No
1 0
1 1
^
1
Feasible net j
reduction
£m
Survey prices)
Social
security
50
-150
Order
required
Cuts or postponements in capital
and current expenditure.
Increase some charges.
Estimating increase required if
not offset by savings.
5 O t h e r public
services
15
Conuaon
Services
10
Northern
Ireland
25
Proportionate savings.
S E C R E T
.
S E C K E T
PUBLIC EXPENDITURE - THE 1976 SURVEY
Report by the Treasury
Introduction
1.
The report on this year's survey by the Public Expenditure
Survey Committee has been circulated separately. It has bean
prepared in accordance with the ground rules approved by Cabinet.
The figures and the presentation in the PESC Report have been agreed
interdepartmentally. It is necessarily long and complicated. This
Treasury report is designed to meet the requirement for a shorter,
simpler piece of work, summarising the figures and focussing attention
on the main issues.
The White Paper Plan
2.
The last public expenditure exercise required exceptionally­
difficult decisions. These took a long time to reach and the
resulting White Paper (Cmnd 6393) did not appear until Bebruary tills
year. The plans which it set out were intended broadly to stabilise
the level of resources taken by expenditure programme a after 1976-77.
If this was achieved, public expenditure would fall as a proportion
of national output from its present exceptionally high level, ie 60%.
In order to achieve this, most previously planned programmes had to
be scaled down by £3,000 million (at 1975 survey prices) by 197&-79Other programmes were to increase by about £500 million.
3.
For several years the expenditure programmes in successive
White Papers had been substantially exceeded in the event, and there
was widespread criticism of the White Paper plan on the grounds that
the profile of expenditure over the years lacked credibility. The
Government have therefore made it a prime objective to implement
the plan, and prevent it from being frustrated through lack of
will or failure of control. This has been regarded as important
not only for financial and economic reasons but also to demonstrate
the country's ability to plan effectively and achieve objectives.
The Government have made it a further objective to get back on cour**
by carrying out this year'a survey, and reaching decisions on it,
in accordance with a more normal timetable.
1975-76 and 1976-77
4.
Firm estimates of expenditure in the past year, 1975-76, wil
not be available for some months, and the figures in the Survey rep '
do not incorporate all the excess that local authorities seem to
spent. The present assessment is that total expenditure on program '
was quite close to the net provision in the February White Paper.
0-verspending by local authorities, including that on housing, larg^
offset savings elsewhere.
1
01
-
5.
1
Por 1976-77. as part of the effort to keep within planned
expenditure totals, the use of the contingency reserve as a decision
making instrument has been developed in accordance with the atran$ne***
approved by Cabinet.
The contingency reserve in the White Paper ***
equivalent, at current prices, to £875 million.
At the date of
preparation of this report, Cabinet had agreed to £455 million of
this being committed.
In the preparation of the Survey report,
estimating reductions have been incorporated in the Surrey progra***''
On the other hand, there are additional bids for 1976-7? as well **
for future years, and these include some estimating increases in
demand-determined services.
Moreover, on the basis of present inf *"
e
nation, it would be imprudent to assume that, in the absence of
further Government measures, local authorities would overspend by
less than £100 million on current expenditure; and the overspend
well be as much as £200 million, even if the Government is still
pressing for the White Paper figures to be observed.
.
6.
It will be necessary to decide which, of the additional
bids are either ineluctable or have to be accepted for other
reasons.
However, the continued monitoring of the contingency
reserve for the current year will be pursued separately, and tha
present report deals with the decisions which need to be taken in
the Surrey on expenditure programmes for the subsequent years. But
it should be noted meanwhile that the contingency reserve for
1976-77 remains under strain.
It will still therefore be necessary
to pursue vigorously the action decided by Cabinet on 20 Nay to
examine ways of offsetting the prospective excess on housing expendi­
ture and of cutting down claims on the contingency reserve by national­
ised industries, and also
to keep any overspend on local authority
current expenditure to the irreducible minimum.
future Years - Programmes in the Survey
7*
The programmes for 1977-78 and later years set out in the
Survey Report are designed to carry forward so far as possible the
programmes published in the White Paper, in accordance with the
ground-rules which took the implementation of the White Paper plan
as a starting point for the 1976 exercise. But the programmes have
been revalued to 1976 survey prices, and estimating reductions have
been taken into account. Also, additional expenditure approved since
the White Paper has been incorporated in tha programmes; and the
Unite Paper figures for the contingency reserve have been adjusted
downwards.
The resulting picture can be summarised as follows:-
S E C H £ T
3
£ million at 197&
Survey Prices
1977-78 1978-79 1979-80
Total of programmes:- (i)
55,589 , 52,927 53,527
55,700 ; 55,175 . 55,564 55,553
In the White Paper ....
In this Survey
Contingency reserve:In the White Paper ....
1,050
800
In this Survey .
Totalof programmes Wand
contingency reserve:-
5*,439
5^,500
In the White Paper ..
In this Survey
(i)
1,650
1,400
1,425
1,100
1,700
54,352 J 5^,977
5^,275 j 5^,964 55,233
Before taking account of the Civil Service manpower savings
rising to £140 million at
9.
1980-81
1975 Survey
prices in
1978-79.
Thus, the totals of programmes plus contingency reserve in
the Survey are constrained broadly within the White Paper plan.
But
this is achieved only because the Survey programmes take account of
some estimating reductions, while estimating increases are treated
under the Survey ground rules as part of the additional bide on which
decisions have to he taken.
The ground rules provided that bids could
he tabled for additions to the White Paper programmes, if departments
oonsidered this necessary either for the purpose of existing policies
(and it is sometimes difficult to distinguish which of these bids
should be regarded as estimating increases), or to
or projects to be introduced.
enable new polici**
The total amount of aia^the bids which
have been tabled in the Survey, and which are sunmaciaad m a programme
basis in Annex A to this report, is as follows:­
£ million at 1976
Survey Pricea
1977-78 1978-79 1979-80 1980-81
1596
1676
1144
1790
Since finalising the Survey Report we have received some further
additional bids.
10.
Those bids, if accepted, would use up the contingency reserve
and produce an excess over the White Paper totals for the next two
years. But the nature of the individual bids varies substantially.
A limited number are demand-determined in the strict sense and may be
ineluctable or very nearly so. Others flow from existing schemes but
the schemes are capable of being changed to reduce expenditure. Some
bids constitute demands for improvement or new measures which could
b* rejected or postponed. All these will be matters for decision.
Decision, required
11.
The Government now have to decide between three broad approaches:­
(a)
To keep to the White Paper planned totals.
To achieve
this, while maintaining an adequate contingency reserve
for future years, the additional bids, including the
estimating increases on demand-determined services, would
have either to be eliminated, or else offset by reductions
in existing programmes.
(b)
To increase the planned totals above the White Paper
figures.
(c)
To reduce planned totals below the White Paper figures.
A decision between these three broad policies will have to
seen in terms of,and accompanied by, the concrete decisions
required on particular programmes.
Thes individual decisions in
turn nave to be taken in terms of the specific measures required
in order to give effect to them.
Even to implement the existing
White Paper plan, specific measures remain to be taken in order to
achieve some of the savings incorporated in the White Paper figures.
The cases involved are:Reductious in housing subsidies
Savings on school meals
Reductions in the cost of overseas students
The £140 million civil service manpower savings
13.
On the other hand, although concrete decisions on particular
programmes and measures are needed for at least one year ahead in
all cases, and perhaps more in some cases, such decisions are not
necessarily required on all programmes for the whole period covered
by the survey. This point is discussed further below.
Which years?
14.
In last year*s exercise the focus year for decisions was
1973-79-
This was appropriate in an exercise designed to evolve a
new medium-term strategy for public expenditure and a better balance
in the economy over a period of years.
So long as the Government
are sticking to that strategy, whether or not with limited modification
0
to the totals for particular years, then it becomes a matter of year-by­
year budgeting on the lines of the agreed strategy, and the focus shift
to the earlier years of the survey period.
This would be a reversion
to the approach adopted in some earlier stages of the development of
the present public expenditure system, entailing decisions on firm
programmes only for the first year ahead (that is, in the present
exercise, 1977-78) and near-firm programmes for the-second year ahead
(1978-79).
0
15.
There are now special reasons for restoring the emphasis
on the earlier years, and particularly on the year immediately
aaead. First, the credibility of the expenditure profile, and
thua of the Government's whole strategy in this field, will depend
crucially on keeping the planned total next year to this year s level
** most. The decision between the three courses listed above must
^ r e f o r e be taken in relation to 1977-78 la the first instance.
f
*V
In addition, the Chancellors statement on 7 June, following
*ae, sterling crisis, said that, for the current year, the Government
vere determined to ensure that the planned total of expenditure is
*ot exceeded; that they were now reviewing expenditure programmes
for future years in the normal way; and that they would adjust these
Programmes in good time as required to meet the prior claims of
exports and investment in the light of the expected pace of recovery.
% implication, any such adjustment must relate to 1977-78 in the
first instance.
V.
it would in principle be open to Ministers to take decisions
*bout either 1977-78 only, or about 1977-78 and 1978-79, in advance
of settling programme figures for the whole survey period. In any
*ant the status of the figures for the later years would be different
since they will remain subject to year-by-year review in successive
***rcises. whatever provisional view is taken about the prospective
Public expenditure totals for the later years, Ifcere are many
^ v i d u a l programmes on which firm decisions are neither necessary
possible now for as long as 4-5 7*ar* *he*d.
iamtance,
b l o w i n g last year's review of the procedures for approving the
Vestment programmes of the nationalised industries, approval far
100 p e cent of the programme figures is given only for the coming
y*ar (1977-78) with an 85 per cent approval for the subsequent year
r
70 per cent for the year after that.
S E C R E T
Areas for decision
18.
There are 15 programmes in the Survey (9 of them account for
over 85% of the total) and decisions are required on these and on
the size of the contingency reserve.
Annex.
These are summarised in the
The total of public expenditure is made up of these items
together with shortfall and debt interest, but these last two items
cannot be planned but only estimated, and do not require decisions.
At the same time, in taking decisions on the planned total of programmes
and the contingency reserve, it is necessary to consider to what extent
the sum total of public expenditure may be affected by movements
in shortfall and debt interest.
19.
Estimates of debt interest are highly volatile, and depend on
assumptions about future inflation, rates of interest and the size
of the borrowing requirement. On present assumptions it is estimated
that the figures for debt interest which appeared in the last White
Paper should be scaled down by some hundreds of millions (this is
of course nothing like the scale of the increase in estimated debt
interest which was disclosed in the White Paper) but this estimate
is liable to further revision before the next White Paper, according
to the assumptions which seem the most realistic at the time.
For the time being, this reduction in the estimate of debt interest
could be regarded as roughly accounting for the estimated shortfall
which was assumed in the last White Paper.
20.
In the case of a number of programmes, a larger or smaller part
of the functional programme is not in fact controlled functionally,
but forms part of local authority current expenditure; this is not
subject to direct control, whether in total or in its distribution
between local authorities and services, though its size and distribution
is influenced by Government policies and by the rate support grant.
The estimates for 1976-77 compiled in May, on the basis of new returns
from the local authorities, showed that they had overspent the White
Paper figures in the previous year and were budgeting for a further
substantial excess in the current year.
In requesting that this excess
should be cut back, the Government made it clear that in any event
8
the rate support grant for the following year, 1977-78, would
be based on the White Paper figures.
21.
To the extent that the local authorities fail, in the event,
to cut back this year's current spending to the White Paper level,
the actual amount spent next year would have to be got down below
this year's figures, in order to be brought into line with the White
Paper projections.
It has already been explained in paragraph 5
that local authorities may well overspend in the current year and
the present expectation is that, in the absence of further Government
measures, they may well again overspend in 1977-78 by a broadly
comparable amount, ie £100-200 million.
There is, therefore, a
general question which cuts across these functional programmes, ie
whether the Government wishes to set local authorities the target
of cutting expenditure in 1977-78 below the White Paper level, and,
if so, whether it would be realistic to plan in the expectation that
they would do so. It may well be that the effect of setting such a
target might be to produce a better chance of getting down to the
White Paper levels, though not in practice below them.
The answers
to these general questions will affect the decisions on the choice
of options for those programmes in which local authority current
expenditure forms an important part.
22.
As regards the contingency reserve, the figure which has
been included for 1977-78 in the Survey is about the same, in real
terms, as the reserve provided for 1978-77
Paper.
l
n
last February's White
But there are. still 9 months to go until 1977-78 even begins.
If any new claims on the reserve were to be accepted without replen­
ishing it by savings on expenditure programmes, this year s experience
1
suggeststhat the remaining reserve would be too small in relation
to the bids that can be expected during the course of a year.
S E C R E T
9
23.
The ground rules for the public expenditure survey
provided both for the tabling of additional bids and for the
working out of options for reducing the survey programmes by Z\
per cent in 1977-78 and 5 per cent in 1973-79. A general 2$ per
cent reduction of planned expenditure programmes in 1977-78 would
involve about £1.3 billion; this would reduce the public sector
borrowing requirement by about £1 billion. In relation to 1977-78
the contribution to be made by public expenditure savings to a reduction
in the borrowing requirement would depend less on arguments of
principle about the balance between changes in expenditure and taxations
and less on considerations of what financial opinion might expect, than­
on what is feasible in making adjustments for the year immediately
ahead. In some programmes reductions of 2-J- per cent would be feasible *
in others more, and in others less.
HM Treasury
June 1976
S E C R E T
SECRET
SUMMARY
OF PUBLIC
ANNEX
EXPENDITURE
AND ADDITIONAL
A
PROGRAMMES
BIDS
£ million at 1976 Survey prices
Programme
Programme
1.
Defence
2.
1980-81
1976-77
1977-78
1978-79
1979-80
5621
-
5644
5627
5652
1007
2
1275
63
1375
201*
1472
65*
1110
24
85
853
3
9
632
63 2
15
600
14
598
20
2762
258
260
2606
6
332*
2569
2548
339*
2460
4o4*
3690
55
3310
369
3477
399
3613
242
3612
335
2686
10
2489
248 9
17
2284
2284
19
2279
37
2265
30
4574
175
4435
267
4381
274
4468
121
4468
124
2458
18
2470
68
2385
114
2369
88
2368
56
1811
3
1833
176*
1813
62
1816
70
1816
85
7500
10
7362
85
7247
106
7220
109
7249
109
444
502
571
579
-
-
5630
190*
-
Overseas aid and other overseas
services
3.
Agriculture, fisheries, food and
forestry
Trade, industry and employment
5.
Nationalised industries
6.
Roads and transport
7.
Housing
s.
Other environmental services
3.
Law, order and protective services
10.
10.
3*40*
-
1542
82
Education, libraries, science
PPer end of range
which export and shipbuilding
credit refinance:
Survey figures
u
Q f
Additional bids.'...
"lu1ing British
I
n
Shipbuilders.
-
Aerospace and British
153
101
85
74
535
100
CONTVD
SUMMARY OF PUBLIC EXPENDITURE PROGRAMMES
AND ADDITIONAL BIDS
Programme
11. Health and personal social
services
Survey figures
Additional bids
12. Social Security
Survey figures
Additional bids
1 3 . Other public services
Survey figures
Additional bids.....
14. Common services
Survey figures..
Additional bids.
Northern Ireland
15.
Survey figures..
Additional bids.
Contingency Reserve
Survey figures
Total Survey figures^'
Total Additional bids
(1)
£ million at 1976 Survey prices
1976-77
1977-78
1978-79
1979-80
19*
6610
21
6710
30
6813
681
175!
11448
-60
11558
136
11474
28
11480
-92
1145J
8^0
19
850
38
840
826
808
9
831
858
11
1629
-1
1597
6
1530
10
1532
400
800
1100
1400
5487?
54500
513
1596
6515
66
12
54275
1676
52
844
71
15:
17
54964
1144
Before taking account of the Civil Service manpower-savings rising to £140 milli
at 1975 Survey prices in 1978-79­
on