IFS
The 2007 CSR :
A Challenging Spending Review
Carl Emmerson
Institute for Fiscal Studies
20 February 2007
Main points
• Fiscal tightening projected by Treasury
– taxes to rise and spending to fall as a share of
national income
• A Challenging Spending Review
– some tight allocations already made
– apparent trade-off between schools, hospitals and
child poverty
• Plans could be topped up in future
– but would require additional finance, which would
be likely to mean further tax increases
© Institute for Fiscal Studies, 2007
50
Total expenditure
Receipts
Current expenditure
45
40
35
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
97–98
30
96–97
Percentage of national income
Forecast fiscal tightening
Financial year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
50
48
46
44
42
40
38
36
34
32
30
Real increase (LH axis)
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
97–98
Level (RH axis)
Percentage of national
income
8
7
6
5
4
3
2
1
0
-1
-2
96–97
Percentage real increase
Total Managed Expenditure
Financial year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
50
48
46
44
42
40
38
36
34
32
30
Real increase (LH axis)
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
98–99
97–98
Level (RH axis)
Percentage of national
income
8
7
6
5
4
3
2
1
0
-1
-2
96–97
Percentage real increase
Total Managed Expenditure
Financial year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
A challenging spending review?
Av. annual increase (%)
2007 CSR
© Institute for Fiscal Studies, 2007
Current
Capital
Total
+1.9?
+2.7
+2.0?
A challenging spending review?
Av. annual increase (%)
Current
Capital
Total
+1.9?
+2.7
+2.0?
April 1999 to March 2008
+3.6
+15.6
+4.0
April 1997 to March 1999
–0.3
+6.7
–0.2
2007 CSR
Labour
© Institute for Fiscal Studies, 2007
A challenging spending review?
Av. annual increase (%)
Current
Capital
Total
+1.9?
+2.7
+2.0?
April 1999 to March 2008
+3.6
+15.6
+4.0
April 1997 to March 1999
–0.3
+6.7
–0.2
+1.7
–4.9
+1.5
2007 CSR
Labour
Conservatives
April 1979 to March 1997
© Institute for Fiscal Studies, 2007
How has spending increased?
Total
3.2
NHS
6.2
Education
4.4
Other
2.3
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Average annual real growth (%)
© Institute for Fiscal Studies, 2007
Source: HM Treasury
Note: Average annual increase 1996–97 to 2007–08
Known allocations
• Home Office
– real freeze
• Cabinet Office, HM Treasury, HM Revenue &
Customs, administrative part of DWP
– cut of 5% per year in real terms
• Department for Constitutional Affairs
– cut of 3½ per year in real terms
• 5 smaller departments
– cut of 5% per year in real terms
© Institute for Fiscal Studies, 2007
The difficult trade off?
• Education spending
• Child poverty
• Health spending
© Institute for Fiscal Studies, 2007
School spending
“Our long-term aim should be to ensure
for 100 per cent of our children the
educational support now available to just
10 per cent”
© Institute for Fiscal Studies, 2007
Source: HM Treasury
School spending
Remaining
shortfall, £2,330
Extra capital
(Budget 2006)
2010–11, £147
Private spend
= £8,000
2005–06
spend, £5,019
Extra current
(PBR 2006)
2007–08, £20
Extra current
(Budget 2006)
2007–08, £56
Extra capital
(SR 2004)
2007–08, £87
Extra current
(SR 2004)
2007–08, £341
© Institute for Fiscal Studies, 2007
Source: DfES
School spending
• 2007 CSR cannot meet this target
– To meet in 2010–11 :
£2,330 per pupil * 7.2m pupils ≈ £17bn
• Were pupil numbers to remain constant :
14 years at 2½% p.a.
7 years at 5% p.a.
• Gap not closed if private spending increases
– current state spending at 1996–97 private levels
© Institute for Fiscal Studies, 2007
Child poverty in 2010 and 2020
35
OECD poverty rate, %
30
Actual
Target
Current policy baseline
25
20
15
10
5
2010 Cost = £4½bn to £13bn p.a.
depending on targeting
20–21
19–20
18–19
17–18
16–17
15–16
14–15
13–14
12–13
11–12
10–11
09–10
08–09
07–08
06–07
05–06
04–05
03–04
02–03
01–02
00–01
99–00
0
Financial year
© Institute for Fiscal Studies, 2007
Source: Brewer, Browne and Sutherland (2006)
Percentage of national income
Health spending
9.0
8.0
7.0
6.0
5.0
Public
Private
Total
4.0
3.0
2.0
1.0
0.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
© Institute for Fiscal Studies, 2007
Source: OECD
Health spending
NHS spending under Labour
10
9
Level (RH axis)
11–12
10–11
09–10
08–09
07–08
06–07
4
05–06
0
04–05
5
03–04
2
02–03
6
01–02
4
00–01
7
99–00
6
98–99
8
97–98
8
Percentage of national
income
10
Real increase (LH axis)
96–97
Percentage real increase
12
Financial year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
Wanless review
Fully engaged scenario:
“levels of public engagement in relation to their
health are high: life expectancy increases go
beyond current forecasts, health status improves
dramatically and people are confident in the health
system and demand high quality care. The health
service is responsive with high rates of technology
uptake, particularly in relation to disease
prevention. Use of resources is more efficient.”
© Institute for Fiscal Studies, 2007
Source: HM Treasury
Health spending
NHS spending under Labour
10
9
Wanless recommendation
11–12
10–11
09–10
08–09
07–08
06–07
4
05–06
0
04–05
5
03–04
2
02–03
6
01–02
4
00–01
7
99–00
6
98–99
8
97–98
8
Percentage of national
income
10
Real increase (LH axis)
Level (RH axis)
96–97
Percentage real increase
12
Financial year
© Institute for Fiscal Studies, 2007
Source: HM Treasury
Health spending
EU total health spending, 2003
Germany
Greece
France
Belgium
Portugal
UK (2010–11?)
Austria
Sweden
UK (2007–08?)
Netherlands
Denmark
Italy
Spain
UK
Luxembourg
Finland
Ireland
Unweighted Weighted
10.8
10.5
10.4
10.1
9.8
9.6
9.3
9.1
8.9
8.4
7.9
7.8
7.7
7.4
7.2
0
1
2
3
4
5
6
7
8
Percentage of national income
9
10
11
12
© Institute for Fiscal Studies, 2007
Source: OECD; IFS
Health spending
EU total health spending, 2003
Germany
Greece
France
Belgium
Portugal
UK (2010–11?)
Austria
Sweden
UK (2007–08?)
Netherlands
Denmark
Italy
Spain
UK
Luxembourg
Finland
Ireland
Unweighted Weighted
10.8
10.5
10.4
10.1
9.8
9.6
9.3
9.1
9.1
8.9
8.4
7.9
7.8
7.7
7.4
7.2
0
1
2
3
4
5
6
7
8
Percentage of national income
9
10
11
12
© Institute for Fiscal Studies, 2007
Source: OECD; IFS
Health spending
EU total health spending, 2003
Germany
Greece
France
Belgium
Portugal
UK (2010–11?)
Austria
Sweden
UK (2007–08?)
Netherlands
Denmark
Italy
Spain
UK
Luxembourg
Finland
Ireland
Unweighted Weighted
10.8
10.5
10.4
10.1
9.8
9.7
9.6
9.3
9.1
9.1
8.9
8.4
7.9
7.8
7.7
7.4
7.2
0
1
2
3
4
5
6
7
8
Percentage of national income
9
10
11
12
© Institute for Fiscal Studies, 2007
Source: OECD; IFS
What increases might we have?
Total Managed Expenditure
2.0
TME after refilling margin
1.8
Of which:
Home office
0.0
-5.0
9 smaller departments
-3.5
Department for Constitutional Affairs
Official Development Assistance
11.2
Debt interest
2.0
Social security and tax credits
1.6
Non NHS, non-education
NHS and education
-6 -5 -4 -3 -2 -1
0
1
2
3
4
5
6
7
8
9 10 11 12 13
Percentage real increase
© Institute for Fiscal Studies, 2007
Source: HM Treasury ; IFS
What increases might we have?
Total Managed Expenditure
2.0
TME after refilling margin
1.8
Of which:
Home office
0.0
-5.0
9 smaller departments
-3.5
Department for Constitutional Affairs
Official Development Assistance
11.2
Debt interest
2.0
Social security and tax credits
Non NHS, non-education
2.5
0.0
NHS and education
-6 -5 -4 -3 -2 -1
3.3
0
1
2
3
4
5
6
7
8
9 10 11 12 13
Percentage real increase
© Institute for Fiscal Studies, 2007
Source: HM Treasury ; IFS
Annual real growth in education
spending (%)
A trade-off between health and
education?
10
9
8
3.3%
7
6
5
4
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
Annual real growth in education
spending (%)
A trade-off between health and
education?
10
9
8
3.3%
7
6
5
4
Labour to date
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
Annual real growth in education
spending (%)
A trade-off between health and
education?
Wanless
recommendation =
4.4%
10
9
8
3.3%
7
6
5
4
Labour to date
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
Annual real growth in education
spending (%)
A trade-off between health and
education?
Wanless
recommendation =
4.4%
10
9
8
3.3%
7
6
5
4
Labour to date
Expected growth in
national income =
2½%
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
Annual real growth in education
spending (%)
A trade-off between health and
education?
Wanless
recommendation =
4.4%
10
9
8
3.3%
4.1%
7
6
5
4
Labour to date
Expected growth in
national income =
2½%
3
2
1
0
0
1
2
3
4
5
6
7
8
Annual real growth in health spending (%)
© Institute for Fiscal Studies, 2007
9
10
A ‘firm and fixed’ CSR?
Average annual real growth
7.0
6.0
Original CSR 1998 plans
Adjusted for lower inflation
Latest outturn
5.6
6.2
5.7
5.1
5.0
4.5
4.0
3.0
6.6
3.3 3.5
3.8
3.9
3.3
2.8
2.7
2.2
2.0
0.9
1.0
0.0
Total
Managed
Expenditure
© Institute for Fiscal Studies, 2007
Departmental
Expenditure
Limits
NHS
Education
Annually
Managed
Expenditure
Average increases from April 1999 to March 2002
Source: HM Treasury; Department of Health; IFS
Conclusions
• A Challenging Spending Review
– some tight allocations already made
– apparent trade-off between schools, hospitals and
child poverty
• Plans could be topped up in future
– this is what happened under previous (July 1998)
Comprehensive Spending Review
– but would require additional finance, which would
be likely to mean further tax increases
© Institute for Fiscal Studies, 2007
IFS
The 2007 CSR :
A Challenging Spending Review
Carl Emmerson
IFS
The 2007 CSR :
A Challenging Spending Review
Carl Emmerson
Institute for Fiscal Studies
20 February 2007