A Survey of Public Spending in the UK
Rowena Crawford, Carl Emmerson and Gemma Tetlow
Institute for Fiscal Studies September 2009
Address for correspondence: Institute for Fiscal Studies, 7 Ridgmount Street, London WC1E 7AE; email
Rowena_C@ifs.org.uk or Carl_Emmerson@ifs.org.uk or Gemma_Tetlow@ifs.org.uk
Acknowledgements: This Briefing Note is a revision of earlier versions by Carl Emmerson, Christine
Frayne and Sarah Love, which can be downloaded from http://www.ifs.org.uk/bns/bn43_old.pdf. The
paper was funded by the ESRC Centre for the Microeconomic Analysis of Public Policy at the Institute for
Fiscal Studies (grant number M535255111). The authors would like to thank Robert Chote for help and
advice during revision of this Briefing Note, and Lionel Browne for copy-editing. All remaining errors are
the responsibility of the authors.
Contents A Survey of Public Spending in the UK ............................................................................................................................................1 1. Introduction ................................................................................................................................................................................3 2. Public spending in the UK .....................................................................................................................................................4 2.1 Total public spending ............................................................................................................................................................4 2.2 Total public spending in an international context ....................................................................................................6 3. The planning of UK public spending ................................................................................................................................9 3.1 The elements of TME .............................................................................................................................................................8 3.2 Why does the government divide total public spending into DELs and AME? ............................................8 3.3 Resource accounting and budgeting ............................................................................................................................ 12 3.4 How the various parts of TME relate to the fiscal aggregates .......................................................................... 13 4. Spending on each of the main functions over time ................................................................................................ 15 4.1 Social security ........................................................................................................................................................................ 17 4.2 The National Health Service ............................................................................................................................................ 18 4.3 Education ................................................................................................................................................................................. 22 4.4 Defence...................................................................................................................................................................................... 25 4.5 Public order and safety ...................................................................................................................................................... 27 4.6 Debt interest payments ..................................................................................................................................................... 28 4.7 Transport ................................................................................................................................................................................. 31 4.8 Official development assistance..................................................................................................................................... 32 5. Recent issues in public spending .................................................................................................................................... 34 5.1 Regional spending and the Barnett formula ............................................................................................................ 34 5.2 Public sector investment ................................................................................................................................................... 35 5.3 How ‘firm and fixed’ are the Spending Reviews? ................................................................................................... 39 5.4 Departments’ use of end-year flexibility .................................................................................................................... 41 6. Future pressures on public spending ........................................................................................................................... 43 6.1 The government debt burden and medium-term spending plans ................................................................. 43 6.2 Government policy commitments................................................................................................................................. 45 6.3 Longer-term spending pressures .................................................................................................................................. 46 7. Conclusions .............................................................................................................................................................................. 48 Appendix A. Glossary....................................................................................................................................................................... 49 2
1. Introduction
This Briefing Note provides an overview of public spending in the UK. It begins in Section 2 with a
description of total public spending in the UK, how this has changed over time, and a brief international
comparison. Section 3 explains how the current government plans spending, and gives a brief history of
how and why this system for planning public spending has evolved. Section 4 describes the current
allocation of public spending between different areas, and then focuses on how the amounts received by
eight particular areas have changed over time. The areas considered are social security, health, education,
defence, public order and safety, net debt interest payments, transport, and official development
assistance: together these account for about 80 per cent of overall public spending. Section 5 comprises a
discussion of some recent issues in public spending, including: the allocation of spending to the devolved
regions through the Barnett formula, and how this might operate in an environment of spending cuts; the
path of public sector investment over the past 60 years, and how things might look going forwards; and
how the supposedly firm spending settlements have been affected by weak economic growth and
departments’ use of end-year flexibility. Section 6 considers some future pressures on public spending,
including the effect of the government debt burden on future spending plans, and the implications of some
specific policy commitments and aspirations. Section 7 concludes.
Data for most of the spending series contained in this Briefing Note are also available from the Fiscal Facts
section of the IFS website.1
1
http://www.ifs.org.uk/ff/lr_spending.pdf
3
2. Public spending in the UK
2.1 Total public spending
In the fiscal year 2008–09 the UK government spent £618.6 billion, or 43.2 per cent of the UK’s national
income. This translates into just over £10,100 for every person in the UK, or about £13,000 per adult. The
total amount of public spending is set out each year in the Budget. This expenditure is an aggregate
derived from the National Accounts called total managed expenditure (TME). TME comprises
expenditure by the entire public sector – namely, the central government, local authorities and public
corporations. Figure 2.1(a) shows TME in real terms and as a share of national income since 1948–49, and
the latest government projections to 2010–11. Figure 2.1(b) breaks down TME as a share of national
income into various components of spending.
Figure 2.1(a) shows that TME has grown relatively steadily in real terms, while both Figure 2.1(a) and
Figure 2.1(b) show that public spending as a share of national income tends to fluctuate with the
economic cycle. During the recessions of the early 1980s, the early 1990s and the late 2000s TME rose as a
share of national income. This was both because national income grew slowly and because certain
components of public spending (for example, spending on social benefits and debt interest payments)
tend to rise during recessions. The former makes the denominator of the fraction relatively small (which
is particularly important during the late 2000s recession, as inflation is exceptionally low) and the latter
makes the numerator larger. Conversely, during the booms of the late 1980s and late 1990s the ratio of
TME to national income fell.
The gradual increase in TME as a share of national income between April 2000 and April 2006 took place
during relatively strong economic conditions. So this increase reflects a structural increase in public
spending, i.e. an increase in the amount of public spending over and above the ‘natural’ variability that
occurs over economic cycles. Similar to the early 1980s and early 1990s, the recession of the late 2000s is
projected to cause an increase in social benefits spending and TME as a share of national income from
April 2008. TME is forecast to peak at 48.0 per cent in 2010–11, a level not seen since 1982–83.
Figure 2.1(a). TME in real terms, 1948–49 to 2010–11
Between 1948–49 and 2008–09 the average annual real increase in TME has been 3.4 per cent. The
average real rate of increase during the Conservative years of 1979 to 1997 was 1.5 per cent, and under
the Labour government from April 1997 to March 2009 it has been 3.2 per cent. The plans from April
2009 to March 2011, if realised, imply growth averaging 4.7 per cent a year.
4
Figure 2.1(b). Composition of TME as a percentage of national income, 1948–49 to
2009–10
Note: ‘Other current spending’ includes depreciation.
Source: TME is from HM Treasury, Public Finances Databank, July 2009; components of public spending are ONS series ANLO,
ANLT, ANLY, ANNW and ANNZ from Table 2.3C of Financial Statistics Freestanding; GDP is ONS series BKTL from Table A2 of the
UK Economic Accounts. Projections are from Table 2.8 of HM Treasury, Budget 2009: The Economy and Public Finances:
Supplementary Material, April 2009.
Figure 2.2. General government expenditure over the 20th century
Source: T. Clark and A. Dilnot, Long-Term Trends in British Taxation and Spending, IFS Briefing Note no. 25, June 2002
(http://www.ifs.org.uk/bns/bn25.pdf).
Figure 2.2 uses an alternative measure of government spending – general government expenditure – to look
at spending over a longer period. General government expenditure is a narrower measure of government
spending than TME, because the former excludes spending by public non-financial corporations, such as
the formerly nationalised utilities. Government spending as a percentage of national income was relatively
5
low (below 30 per cent) in the 1920s and 1930s, grew rapidly during the Second World War, and fell back
to about 10 percentage points above its pre-war level in the 1950s. From the 1960s onwards the
fluctuations in the path of general government expenditure are very similar to those shown in Figure
2.1(a) and 2.1(b) for TME.
2.2 Total public spending in an international context
In 2008 UK total government outlays as measured by the OECD were 48.1 per cent of national income.2 As
shown in Figure 2.3, this gave the UK the tenth highest level of public sector spending as a proportion of
national income out of the 28 countries for which the OECD has consistent data, and the third highest out
of the G7 countries.
Figure 2.3. Total public spending, OECD countries, 2008
Note: Figures refer to general government total outlays.
Source: Annex 25 of OECD, Economic Outlook No. 85, June 2009 (www.oecd.org/oecdEconomicOutlook).
Figure 2.4 shows how the changes in total government spending as a proportion of national income in the
UK between 1970 and 2010 compare with the experience of a selection of other countries. Most of the
countries had a similar increase in total public spending as the UK during the recessions of the early
1980s, but while the boom of the late 1980s resulted in a significant fall in UK government spending as a
share of national income – helped in part by a real fall in spending on social security benefits (see Figure
4.2(a)) – France, Italy and the USA saw only small falls. All the countries again saw increases in
government spending during the recession of the early 1990s, but this increase was halted or reversed in
Europe and the US by the late 1990s. Since 1999 the UK has experienced a sustained increase in public
spending, greater than that experienced by the other countries described, who typically either maintained
2
For more details see OECD Economic Outlook, Sources and Methods (http://www.oecd.org/eco/sources-and-methods)
6
or saw falls in their levels of public spending as a share of national income. All countries are projected to
see public spending increase rapidly as a share of national income in 2009 as a result of the recession,
with the increase between 2007 and 2010 in the UK – totalling some 10 per cent of national income –
being projected to be the largest among these countries.
Figure 2.4. Total public spending in selected countries, 1991 to 2009.
Source: Data from 1991 onwards are as Figure 2.3. Historical data are from OECD.Stat (http://stats.oecd.org/index.aspx#st).
7
3. The planning of UK public spending
3.1 The elements of TME
For planning purposes, TME is divided into two components:
1.
Departmental expenditure limits (DELs) cover spending that the government argues can be
controlled rather than being driven by demand. For example, most spending on the NHS,
transport and education falls into this category. DELs are supposedly ‘firm limits’ for
departments’ spending over a three-year period. Since 1998 they have been determined in
Spending Reviews once every two or three years. The most recent such review, 2007 Comprehensive Spending Review, fixed the limits for departments until 2010–11.
2.
The remainder of spending, which the government argues cannot sensibly be planned for in
advance, is allocated annually. It is known as annually managed expenditure (AME). The major
components of AME are social security payments, debt interest, and spending by local authorities.
(The government actually has greater control over social security spending than its classification
as AME suggests; the number of people qualifying to receive particular benefits under given rules
may be out of the government’s control, but it can determine the qualification criteria and the
generosity of the payment concerned.) The Treasury publishes forecasts of AME in each PreBudget Report and Budget, which normally take place in autumn and spring of each year,
respectively.
In 2008–09 DELs accounted for 58 per cent of TME, and AME accounted for 42 per cent. Between April
1999 and March 2009 DELs grew at an average real rate of 4.7 per cent per year while AME grew at an
average 2.9 per cent per year. Over the period April 2009 to March 2011, however, AME is forecast to
grow faster than DELs, with planned average annual real growth rates of 8.1 per cent and 2.8 per cent
respectively. This is, in large part, due to high growth in spending on social security benefits and debt
interest payments arising as a result of the recession.
3.2 Why does the government divide total public spending into DELs and
AME?
Gordon Brown introduced the division of public spending into DELs and AME in 1998. It represents the
most recent stage in a gradual evolution in the planning of public spending that has been under way since
the early 1990s. This evolution has seen a lengthening of the time horizons of public spending planning
and an increased focus on controlling departmental spending. The government asserted that its ‘fiscal and
public spending framework has been designed specifically to avoid the mistakes of the past’.3 But when
one compares the current system with its predecessors, it is clear that the new framework does not
represent a radical change. Rather, it is a development of previous techniques to try to minimise the
extent to which the public spending framework produces inefficient incentives for departments.
Public Expenditure Surveys and the control total
Prior to 1992, public spending was determined in annual Public Expenditure Surveys. These usually took
the form of a series of bilateral negotiations between the Treasury and each spending department. This
made it difficult for the government to take a strategic decision on the overall level of public spending, or
on the priorities within the total. Also, the lack of distinction between cyclical and non-cyclical
components was seen as allowing the spending total to ‘creep up’. For example, a rise in discretionary
3
Source: Page 18 of HM Treasury, Planning Sustainable Public Spending: Lessons from Previous Policy Experience, London,
November 2000 (www.hm-treasury.gov.uk/d/86.pdf).
8
spending after a recession could be masked by the fall in cyclical spending. Conversely, the rise in cyclical
spending during recessions could potentially crowd out other programmes, particularly public
investment.
In 1992 the system was reformed to give the government greater power to manage aggregate public
spending in a ‘top-down’ way. Each summer the government set out each department’s total planned
spending for the next three fiscal years. This amount was known initially as the ‘New control total’, later
became the ‘control total’, and was published in the autumn Budget. For example, the November 1996
Budget planned the control total for the years 1997–98, 1998–99 and 1999–2000. However, the plans for
years 2 and 3 were not intended to be ‘set in stone’, and were often increased for certain functions, such as
the NHS. Any department that failed to spend its control total in a given year forwent the unspent money.
Each year’s government spending forecasts included, in addition to the control total, other items such as
the cyclical component of social security, central government debt interest payments, and various
accounting adjustments. Unlike DELs, the control total included non-cyclical social security spending, such
as that on child benefit and the basic state pension, since the numbers of recipients are relatively easy to
predict. The control total excluded only social security payments that were highly cyclical by nature (such
as unemployment benefits). All of these social security spending items are now in AME, even though, as
we noted above, the government determines the qualification criteria for and generosity of payments.
AME also includes various other elements of spending. The control total therefore accounted for a larger
proportion of total public spending (about 85 per cent)4 than DELs do. To allow some flexibility for
reaction to unanticipated events, each year’s planned control total included a reserve, which was not
allocated to individual departments. This reserve was allocated as extra spending or removed from the
spending plans altogether in the Budget prior to the spending year in question. After the control total was
introduced, the Conservative government managed to meet its cash spending plans for the rest of its term
in office. Therefore the reforms of 1992 should be recognised as an improvement in the planning of public
spending. In many respects the control total can be regarded as a forerunner of the Labour government’s
DEL approach.
The Labour government’s criticisms of the 1992 spending framework
The Labour government that came to power in 1997 argued that the control total method of budgeting
hindered departments from spending and investing money in a calculated and efficient fashion. First, the
Labour government argued, the ‘indicative’ nature of the control totals for two and three years ahead
meant that they could be revised substantially up to a year in advance, which created an uncertain
environment for departments to plan expenditure. Second, the fact that the totals were not divided into
current and capital spending meant that, if budgets were tight, departments might be tempted to cut back
on investment to meet more pressing needs, such as public sector workers’ wages. This is because the
effects of underinvestment on the quality and quantity of public services provided may take several years
to become apparent, whereas the effects of cutting back on current spending are noticeable much sooner.
Third, if departments failed to spend the money they had been allocated for a particular year, they were
not able to carry forward the spare cash from one year to the next. This encouraged a ‘use it or lose it’
mentality, and led to concerns that rushed spending towards the end of the financial year might be used
wastefully.
The Labour government argued that, taken together, the factors outlined above encouraged
underinvestment (or inefficient investment) in public services.
4
Source: Chapter 6 of A. Dilnot and C. Giles (eds), Options for 1997: The Green Budget, IFS, London, October 1996.
9
The Spending Reviews
The Labour government replaced a system in which control totals were determined through annual
surveys with one in which departmental spending (within DELs) is formally fixed for three years in
Spending Reviews. There have now been five such reviews: Comprehensive Spending Review in 1998
(planning for April 1999 to March 2002), Spending Review 2000 (planning for April 2001 to March 2004),
2002 Spending Review (planning for April 2003 to March 2006), 2004 Spending Review (planning for April
2005 to March 2008), and 2007 Comprehensive Spending Review (planning for April 2008 to March 2011).
Before each Spending Review, the Economic and Fiscal Strategy Report (now published each spring at the
same time as the Budget) sets out an ‘envelope’ for the next three years’ spending. The Spending Review
then fills in the details, allocating spending by department. For example, the 1998 Comprehensive Spending
Review was preceded by an Economic and Fiscal Strategy Report in June 1998, and the latter set the plans
for TME. The Spending Review then allocated the TME to DELs and AME, and split the DELs by
department.5 Similarly the March 2007 Budget set the TME and planned allocations for the Department
for Education and Skills until March 2011. The October 2007 Pre-Budget Report and Comprehensive
Spending Review then determined the split between DELs and AME, and the remaining departmental
allocations.6
Departments’ DELs are divided into one DEL for capital spending (i.e. for spending that adds to the public
sector’s fixed assets) and another for spending on other items, known as ‘resource’ spending. A
department cannot transfer funds from its capital DEL to its resource DEL. Separating DELs into nonfungible capital and resource components was designed to encourage departments to undertake the
public investment they were budgeted to do. AME is also divided into capital and resource components.
Figure 3.1 shows the current division of total DELs by department for 2008–09, the most recent year for
which actual (as opposed to planned) allocations are available. The DELs are split into capital and
resource components. The graph shows that in 2008–09 the Department of Health had the largest DEL,
and accounted for over one-fifth of total DELs by itself. Defence had the highest capital DEL, at £8.6 billion.
Communities and Local Government (‘CLG Communities’) and the Department of Energy and Climate
Change had the highest ratios of capital DEL to total DEL, making them the most capital-intensive
departments. Their capital DELs each accounted for nearly two thirds of their total DEL. The Department
for Transport was the third most capital-intensive department, with just over half its DEL being accounted
for by capital DEL. Overall, 11.3 per cent of departments’ total DELs was allocated to capital spending. The
amount and form of capital spending done by the public sector are discussed in section 5.
The distinction in DELs between capital and non-capital spending has given the government the ability to
target each type of spending specifically. When the Labour government introduced the distinction, longstanding underinvestment in the public sector was seen as a problem, and the ‘ring fencing’ of capital
DELs helped to correct this. This approach does have potential drawbacks, however. If departments have
a certain proportion of their budgets set aside for capital spending, irrespective of the benefits of that
capital spending relative to the current spending that could be done in its place, then a situation could
arise in which capital spending projects of low value to the public get commissioned while current
spending ones of higher value do not.
5
Similarly, the March 2000 Budget set the TME and planned NHS spending to March 2004; the April 2002 Budget set the TME and
planned NHS spending until March 2008 (whereas all other departments’ plans, which were announced in July 2002, extended only
to March 2006); and the March 2004 Budget set the TME and planned the allocations for the Department for Education and Skills
and for total education spending in the UK until March 2008.
6
Some smaller departments had already had their allocations announced prior to this, in the March 2006 Budget and the December
2006 Pre-Budget Report. The departments whose allocations were announced in the March 2006 Budget were the Home Office,
the administrational part of the Department for Work and Pensions, HM Revenue and Customs, HM Treasury, and the Cabinet
Office. The departments whose allocations were announced in the December 2006 Pre-Budget Report were the Department for
Constitutional Affairs, the Privy Council Office, National Savings and Investments, the Central Office of Information, the Food
Standards Agency, and the Government Actuary’s Department.
10
Figure 3.1. Departmental expenditure limits for each department, 2008–09
Notes: DIUS is the Department for Innovation, Universities and Skills; DEFRA is the Department for Environment, Food and Rural
Affairs; BERR is Business, Enterprise and Regulatory Reform; FCO is the Foreign and Commonwealth Office. The ‘Northern Ireland’
category refers to the Northern Ireland Executive, and does not include the Northern Ireland Office. The Chancellor’s departments
include HM Revenue and Customs, HM Treasury, and the Office for National Statistics. DIUS and BERR were merged in June 2009
to form the new Department for Business, Innovation and Skills (BIS). The distinction between ‘resource DEL’ and ‘capital DEL’ is
explained in Section 3.
Source: HM Treasury, Public Expenditure Outturn Update, July 2009 (http://www.hm-treasury.gov.uk/d/press_66_09.pdf).
More recently the capital budget has been targeted for spending cuts. The October 2007 Comprehensive Spending Review planned for investment spending to continue to rise to 2.3 per cent of national income in
2013–14, while the Treasury’s subsequent Long­Term Public Finance Report, published alongside the
March 2008 Budget, assumed that in the long run this would then stabilise at 2.0 per cent of national
income.7 The government has since cut back its investment plans, and is now planning on investment
spending of 1.3 per cent of national income in 2013–14. If delivered, this would be comparable to the level
seen in the first half of the 1990s. While in the short term the impact of this low level of investment on
public services might be mitigated by the recent high levels of investment spending, it seems clear that
this decision has been motivated by the impact of the financial crisis and recession on the government’s
finances, rather than by a belief that lower levels of investment spending are consistent with its
aspirations (or at least its previous aspirations) for public services.
Another change that was introduced in 1998 was in the way in which any unspent budget allocation is
dealt with at the end of the financial year. Instead of forgoing any money that is not spent in the year to
7
Paragraph 3.44, page 31, HM Treasury, Long-Term Public Finance Report: An Analysis of Fiscal Sustainability, March 2008
(http://www.hm-treasury.gov.uk/d/bud08_longterm_586.pdf).
11
which it is allocated, departments can now carry funds over from one fiscal year to the next by accruing an
end­year flexibility (EYF) entitlement. Under the EYF scheme departments retain an entitlement to all of
their unspent DELs from previous years (less any adjustments for any DEL reserve claims agreed during
the course of the year).8 The government hoped that this would remove the incentive for end-of-year
‘splurges’. But comparing the monthly totals for central government cash outlays before and after the
introduction of EYF entitlements, there appears to have been hardly any change in the proportion of
annual spending that takes place in the final months of the financial year. Figure 3.2 shows the proportion
of central government total cash outlays that were spent in the final month, and final two months, of each
financial year for the past two decades. There seems to be little difference between these proportions
before and after the introduction of EYF (represented by the dashed line). The average proportions spent
in the final month and two months of the financial year between 1988―89 and the introduction of EYF in
1998―99 were 9.8 per cent and 18.0 per cent respectively. In the period since the introduction of EYF
these have fallen slightly to 9.5 per cent and 17.4 per cent respectively. These figures are still both higher
than if spending was evenly distributed over the financial year, in which case 8.3 per cent (1/12th) would
be spent in the last month, and 16.7 per cent (2/12ths) in the last two months.
Figure 3.2. Proportion of central government net departmental outlays spent in the
final months of the financial year, 1988―89 to 2008―09
Source: ONS series RUUP from Financial Statistics Freestanding, Table 2.1A.
3.3 Resource accounting and budgeting
Prior to the changes announced in 1998, spending was listed in a department’s budget in the year in
which it took place. Public spending was either ‘current’ or ‘capital’, the former being spending on items
such as wages and the latter being spending on fixed items such as buildings, vehicles and machinery. In
199, the government decided to change from cash-based budgeting to resource accounting and budgeting (RAB). The aim of RAB is to provide an accurate account of a department’s underlying financial position in any given year, rather than a snapshot of how much money went into/out of that department
as cash. For instance, depreciation does not show up in cash-based spending plans, because the
department is not literally paying cash for it each year. But it is a genuine annual cost that worsens the
8
EYF was introduced in HM Treasury, Economic and Fiscal Strategy Report 1998: Long Term Stability and Investment, Cm. 3978,
London, June 1998
12
department’s asset position. If, for example, a department buys an item of machinery worth £10 million
that has a resale value of £0 at the end of 10 years, then (under ‘straight-line’ depreciation) the
department ‘loses’ £1 million-worth of machine each year, although the loss does not take the form of a
cash payment. RAB takes this loss into account.
The move to RAB took place in two stages. In Spending Review 2000 the DELs were given on an ‘accruals’
basis. Under accruals accounting, costs and revenues are matched to the years in which they occurred, as
opposed to the years in which the cash entered or left the department. The second stage was the
incorporation of non-cash costs, such as depreciation and ‘cost of capital’ charges (which reflect the
opportunity costs of holding capital), into resource DELs. This happened in the 2002 Spending Review.
•
All current spending is in the resource budget (resource DEL + resource AME). Unlike the old
current budget, the resource budget includes the costs of depreciation, ‘cost of capital’ charges,
provisions for future costs, and grants paid to the private sector.
•
The capital budget (capital DEL + capital AME) includes only departmental spending on items
that create new assets on the balance sheet of the government. Grants to non-governmental
organisations to fund those organisations’ investments are not included, because the grants do
not change the government’s net asset position.
3.4 How the various parts of TME relate to the fiscal aggregates
The resource budget of all government departments measures the government’s spending on various
current items. It is closely related to public sector current expenditure. The connection between the two
fiscal measures is shown in Figure 3.3. Similarly, capital DELs and capital AME relate to public sector net
investment, as shown in Figure 3.4.
Figure 3.3. The components of public sector current expenditure
Resource budget of departmental DELs
+
Resource budget of non-departmental DELs
= Resource DEL
+
Resource budget of departmental AME
+
Resource budget of other AME
= Resource AME
+
Accounting adjustments
+
Adjustments for classification differences
= Adjustments
=
Public sector current expenditure
13
Figure 3.4. The components of public sector net investment
Capital budget of departmental DELs
+
Capital budget of non-departmental DELs
= Capital DEL
+
Capital budget of departmental AME
+
Capital budget of other AME
= Capital AME
+
Accounting adjustments
+
Adjustments for classification differences
= Adjustments
Depreciation
=
Public sector net investment
Total managed expenditure is the sum of public sector current expenditure, public sector net
investment and depreciation.
Public sector current expenditure plus depreciation, when subtracted from public sector current receipts,
gives the current budget surplus. So an increase in resource spending that increases public sector
current expenditure (or depreciation) will reduce the current budget surplus.
Public sector net borrowing in a given year reflects the difference between public sector net investment
and the current budget surplus (or, equivalently, the difference between current receipts and TME). So a
larger amount of capital spending in a given year means an increase in public sector net investment. This
adds to public sector net borrowing, and increases the public sector net debt ratio.
14
4. Spending on each of the main functions over time
The amounts allocated to spending functions differ from the allocations to government departments
(which were shown in Figure 3.1). For example, spending on education comprises spending from the DEL
of the Department for Children, Schools and Families and DIUS, spending by local authorities, and
spending in Scotland, Wales and Northern Ireland. The DEL of the Department for Work and Pensions is
only a small proportion of spending on social security, because most of this spending takes the form of
AME.
Figure 4.1 shows where government spending in 2008–09 went, by function. Seven of the areas we shall
examine individually – social security, the National Health Service (NHS), education, defence, public order
and safety, net debt interest payments, and transport – together accounted for nearly 80 per cent of total
spending in 2008–09. The biggest of these, social security, accounted for 27 per cent by itself. The UK
government’s spending per family amounted, in 2008–09, to about £5,400 on social security, £3,600 on
health, £2,600 on education, £1,200 on defence, £1,100 on public order and safety, £800 on debt interest
payments, and £700 on transport. We can therefore account for, and explain changes in, most of
government spending by understanding what changes have taken place in these seven areas. We also look
briefly at spending on overseas aid at the end of this section.
Figure 4.1. UK government spending measured as TME, by function, 2008–09
Source: Social security spending is taken from Budget 2009 estimates. Net debt interest payments are from ONS series ANLO and
ANBQ. All other figures are taken from HM Treasury, Public Expenditure Statistical Analyses 2009.
Table 4.1 shows the real average annual rate at which public spending in the seven areas mentioned
above has changed over time. Spending on social security, education and the NHS has grown faster over
the past five decades than have total public spending, current spending and national income. These three
areas have therefore increased their respective shares of public spending and national income. The NHS in
particular has experienced substantial growth, with average annualised real increases of 3.2 per cent
under the Conservative governments from 1979 to 1997, and 6.3 per cent under Labour from 1997 to
15
2008. Spending on public order and safety has also experienced very high real growth over the period
since 1979, with an average annual growth rate of 4.0 per cent between April 1979 and March 1997, and
3.7 per cent between April 1997 and March 2008.
In contrast, spending on net debt interest payments has historically grown more slowly than TME: under
the Conservatives between 1979 and 1997 real average annual growth was just 0.6 per cent, and under
the Labour government to date spending on net debt interest has been falling by an average 2.5 per cent in
real terms each year. However, from April 2008 this area of spending is forecast to increase at an average
annual real rate of 16.1 per cent, which is far more rapid than the growth seen in any other area of public
spending.
Expansions in health, education and social security spending have been at the expense of other spending
areas. Defence in particular saw a lengthy period of falling spending under the Conservatives, and has
seen relatively slow growth under the Labour government to date. Net investment spending also saw a
long-term decline, with an average annual real decline of 5 per cent during the Conservative government
1979 to 1997. However, under the Labour government investment spending increased dramatically, with
average real growth of 13.9 per cent a year between 1997 and 2008. The path of investment spending
over the last five decades is discussed in more detail in section 5. The changes in current and capital
spending have had drastic effects on the composition of public spending. The ratio of current to
investment spending has increased from 10:1 in 1958–59 to 19:1 in 2007–08, hitting peaks of 118:1 in
1988–89 and 70:1 in 2000–01.
Table 4.1. Real increases in spending in the main areas.
Long-term trend
Annualised average real increase, %
April 1979 to
April 1997 to
March 1997
March 2008*
3.8
1.4
3.2
6.3
1.5
4.3
–0.5
1.4*
4.0
3.7
0.6
–2.5
0.4
4.8
April 2008 to
March 2011
5.2
4.3
2.9
n/a
n/a
16.1
n/a
Social security
NHS
Education
Defence
Public order and safety
Net debt interest payments
Transport
4.5
4.6
4.4
0.2
n/a
2.1
n/a
TME, of which:
Net investment
Current spending
3.4
3.7
3.5
1.5
–5.0
2.1
3.2
13.9
3.0
4.7
5.7
4.7
National income
3.2
2.2
3.0
–0.7
Notes: *Defence trend is April 1998 to March 2008. ‘Current spending’ includes depreciation. Long-term trends are 1949–50 to
2008–09 for TME, current spending, net investment, net debt interest payments and social security; 1950–51 to 2008–09 for the
NHS; 1954–55 to 2008–09 for education; and 1954–55 to 1997–98 for defence.
Sources: HM Treasury, Public Expenditure Statistical Analysis 2009 and previous PESAs; HM Treasury, Public Finances
Databank, July 2009; HM Treasury, Public Expenditure Outturns – key series update July 2009; HM Treasury, Budget 2009; HM
Treasury website (http://www.hm-treasury.gov.uk/d/gdp_deflators.xls); Office for National Statistics, Blue Book; Office for
National Statistics, Financial Statistics Freestanding; Office for National Statistics, UK Economic Accounts; Office of Health
Economics.
Table 4.2 shows spending in the same areas as a percentage of national income at various points over the
last 50 years. Once again, social security, the NHS and education are the main areas of growth. TME itself
occupied a larger share of national income in 2008–09 than in 1958–59, and, within TME, current
spending’s share has grown while net investment’s share is still less than what it was in 1958–59. There
has however been a significant increase in investment spending’s share of national income since the late
1990s.
16
Table 4.2 Spending as a share of national income in the main areas
Social security
NHS
Education
Defence
Public order and safety
Net debt interest payments
Transport
TME, of which:
Net investment
Current spending
1958–59
6.0
3.2
3.3
6.4
n/a
2.7
n/a
36.9
3.4
33.5
Percentage of national income, %
1978–79
1996–97
9.8
13.1
4.4
5.1
5.2
4.6
4.5
2.8
1.5
2.0
3.9
2.9
1.6
1.2
45.1
2.5
42.6
39.9
0.7
39.2
2008–09
11.9
7.8
5.7
2.6
2.4
1.7
1.5
43.2
2.5
39.4
Notes: Net investment spending and current spending may not sum to TME exactly because of rounding. ‘Current spending’
includes depreciation.
Sources: As Table 4.1.
4.1 Social security
Social security is the largest single component of public spending. Its share of general government
expenditure had risen from about 15 per cent just after the Second World War to 30 per cent by the late
1990s.9 As a share of TME, social security spending increased from 14.5 per cent in 1948–49 to a peak of
33.0 per cent in 1996–97, before falling to 27.5 per cent by 2008–09.
Spending on public sector social benefits in real terms, from fiscal year 1948–49 onwards, can be seen in
Figure 4.2(a). The same spending, presented as a share of national income, is shown in Figure 4.2(b).
Much of the variation in social security spending over time is due to fluctuations in the economic cycle, as
is shown in Figure 4.2(a) and accentuated in Figure 4.2(b). For example, social security dipped markedly
during the late 1980s, mainly because rising incomes and falling unemployment reduced people’s reliance
on benefits such as income support and support for the unemployed. A similar dip in spending occurred in
the late 1990s: this happened partly because Labour’s tight spending limits allowed benefits only to be
increased in line with prices for the government’s first two years, and partly because of strong economic
performance, which delivered rising incomes and falling unemployment. By contrast, in the recessions of
the early 1980s, the early 1990s and the late 2000s social security spending as a share of national income
increased markedly, owing to rising spending on unemployment and means-tested benefits, and poor
economic growth.
Because social security is so responsive to the economic cycle, unlike other spending areas it is planned
largely on an annual basis. The total DEL for the Department for Work and Pensions (DWP), which
administers social security, was set in the 2007 Comprehensive Spending Review to be just under £8 billion
in 2008–09 – compared with AME for social security of £170 billion. However, spending on the basic state
pension alone totalled £47.7 billion in 2007–08, which was 30.6 per cent of total benefit and tax credit
expenditure in the UK.10 The number of individuals entitled to this benefit is actually largely unresponsive
to the economic cycle. This suggests that a large component of AME can be forecast with reasonable
accuracy more than a year in advance. Indeed, the Conservative government was able to include a large
proportion of social security in its control total.
9
Source: T. Clark and A. Dilnot, Long-Term Trends in British Taxation and Spending. IFS Briefing Note no. 25, IFS, London, 2002.
10
Source: Department for Work and Pensions, Benefit and Expenditure Tables (available at
http://research.dwp.gov.uk/asd/asd4/expenditure.asp)
17
Figure 4.2(a). Social security spending in real terms, 1948–49 to 2010–11
Figure 4.2(b). Social security spending as a share of national income, 1949–50 to 2010–
11
Source: 1949–50 to 2007–08 from ONS series ANLY; 2008–09 to 2010–11 from HM Treasury, Budget 2009.
Projections for social security spending to 2010–11 indicate rising spending in real terms, owing to the
impact of the recession in the late 2000s. However, the projections in Figure 4.2(a) and 4.2(b) incorporate
only spending announcements up to the present, so any further government announcements that increase
social security spending will change the prognosis. There are a number of government aspirations that
represent sources of upward pressure to spending on social security. These are discussed in section 6. The
accuracy of the projections also depends on that of the macroeconomic forecasts. If the economy is slower
to recover from the recession than anticipated, or if unemployment remains high for longer, then social
security spending over the next few years could be higher than currently being forecast.
4.2 The National Health Service
Spending on the NHS has grown significantly – both as a share of public expenditure and as a share of
national income. Between 1949–50 and 2007–08 it went from 9.3 per cent of TME to 18.3 per cent. The
fact that overall health spending (i.e. public and private) has increased as a share of national income is not
surprising, for at least three reasons: the demographic changes that have increased the proportion of
18
elderly people in the population; the general propensity of societies to spend a higher share of their
income on health as that income rises; and the increase in the range of treatable ailments. These are likely
to outweigh the countervailing pressure from technological improvements and the expiry of patents,
which should reduce the cost of treatments over time.
Figure 4.3(a) shows that spending on the NHS has grown steadily in real terms. From April 1979 to March
1997 UK NHS spending rose at an average annual real rate of 3.2 per cent. Between April 1999 and March
2008 spending on the NHS grew by an average 6.3 per cent a year in real terms. According to the plans set
out in Budget 2009 the average annual growth rate is expected to slow to 4.3 per cent between April 2009
and March 2011.
Figure 4.3(a). Historical and forecast NHS spending in real terms 1949–50 to 2010–11
Figure 4.3(b). Historical and forecast NHS spending as a share of national income,
1949–50 to 2010–11
Source: 1949–50 to 2007–08 from Office of Health Economics; 2008–09 to 2010–11 uses plans for NHS England from HM
Treasury, Budget 2009, and assumes that regions’ shares of UK health spending are the same as their shares of UK NHS spending,
and that these shares remain constant over time (at England 83%, Scotland 9%, Wales 5% and Northern Ireland 3%). Shares of UK
health spending are from HM Treasury, Public Expenditure Statistical Analyses 2009.
The spending increases seen since the late 1990s are not only much larger than in past decades, but have
also been more sustained than any spending increases in the past. Historically the NHS has often received
large real increases in spending for one or two years in a row, interspersed with years of lower spending
19
growth. For example, the annual real increases in NHS spending were 7.4 per cent and 4.8 per cent in
1980–81 and 1981–82 respectively, but spending growth in 1982–83 fell to 2.0 per cent.
The recent substantial increases in NHS spending were determined in light of the recommendations of the
Wanless Review, an independent review of the health service in the UK that was undertaken by Derek
Wanless and completed in April 2002.11 The review set out three scenarios for funding the NHS up to
2022–23, each of which made assumptions about the future demand for and supply of healthcare,
including factors such as levels of obesity, smoking rates, lifestyle changes, demographic change and
increases in NHS productivity. The government agreed to meet the spending figures implied by the
scenario with the most optimistic view of the future (the ‘fully engaged’ scenario – which required the
lowest growth in NHS spending) up to March 2008.
In 2007 a review of NHS funding and performance since 2002–03 was conducted.12 Wanless concluded
that spending on the NHS up to 2007–08 had increased broadly in line with the 2002 recommendations
for the ‘fully engaged’ scenario, but that the spending increases had not been combined with the
productivity increases that were assumed in the review. Increases in NHS productivity have been more
like those assumed under the ‘slow uptake’ scenario (the Wanless scenario with the least optimistic view
of the future, and requiring the greatest increases in NHS funding). This means that funding increases
even greater than those recommended in the 2002 Wanless Review for 2010–11 to 2022–23 would be
needed if the high-quality services envisaged for 2022–23 are to be delivered. A recent analysis by
Appleby, Crawford and Emmerson shows that the plans for total public spending over the period to 2017–
18 will, in the absence of deep cuts to spending on public services elsewhere, lead to spending on the NHS
falling further behind that deemed necessary by the initial Wanless Review, and that increased NHS
productivity is unlikely to be sufficient to fill the gap.13
The vast majority of health expenditure in the UK is financed publicly – nearly 87 per cent in 2008. Figure
4.4 shows how public and private health expenditure, each as a proportion of national income, have
changed over time. Private health expenditure, as a share of national income, has been gradually
increasing since the mid–1970s, from 0.5 per cent in 1975 to a peak of 1.4 per cent in 1999. However,
since then, private health expenditure has been declining, falling to 1.1 per cent by 2005. The rapid
increases in NHS spending since 1999–00 could be in part responsible for this. The increase in NHS
spending, and the consequent improvement in services and reduction in waiting times, has reduced the
quality differential between the NHS and the private sector. This could have reduced individuals’
willingness to pay extra for private health care, and so the increases in NHS spending may have crowded
out some health spending that would otherwise have occurred privately. It is clear from Figure 4.4,
however, that despite the fall in private health spending since 1999, total health care spending in the UK
as a share of national income has been increasing rapidly over this period, and so most of the increase in
NHS spending does represent additional UK health spending.
11
D. Wanless, Securing Our Future Health: Taking a Long-Term View, HM Treasury, London, April 2002.
12
D. Wanless, J. Appleby, A Harrison and S. Patel, Our Future Health Secured? A review of NHS funding and performance, King’s
Fund, 2007 (http://www.kingsfund.org.uk/document.rm?id=7143 )
13
See J. Appleby, R. Crawford and C. Emmerson, C. How cold will it be? Prospects for NHS funding: 2011–17, King’s Fund,
London, 2009 (http://www.ifs.org.uk/publications/4567).
20
Figure 4.4. Private and public health expenditure in the UK, 1960 to 2007
Source: OECD, OECD Health Data 2009.
Figure 4.5 shows how the share of national income that the UK spends on health compares with that for
five other major economies in 2006. All of the other countries except Japan spend a higher share of
national income on health than the UK does. The USA, which is the biggest spender on health in the OECD,
devotes a share of income that is over 80 per cent higher. As well as spending a relatively low share of
national income on health, the UK also finds a relatively high proportion of that publicly. Out of total
spending on health, 82.0 per cent is public expenditure in the UK, compared with 81.3 per cent in Japan,
79.1 per cent in France, 76.8 per cent in Italy and Germany, and just 45.2 per cent in the USA.
Figure 4.5. Spending on health as a share of national income in selected major
economies, 2006
Source: OECD, OECD Health Data 2009.
21
4.3 Education
The percentage of general government expenditure devoted to education spending rose steadily from 7.3
per cent in 1953 to 13.3 per cent in 1973. By 1979 it had fallen to 12.2 per cent. Measured as a share of
TME, education spending has remained relatively steady between 10 and 13 per cent for the past 45 years.
In real terms, the average annual increase in education spending between 1954–55 and 2008–09 was 4.3
per cent. Figure 4.6(a) shows that education spending remained almost unchanged in real terms between
1978–79 and 1985–86, after which it rose gradually until 1994–95, then fell very slightly, and has recently
begun to increase at a faster rate from April 2000. Viewed as a share of national income, education
spending increased rapidly until the 1970s, and has since fluctuated at around 5 per cent (Figure 4.6(b)).
Figure 4.6(a). Historical and forecast education spending in real terms, 1987–88 to
2010–11
Figure 4.6(b). Historical and forecast education spending as a share of national income,
1987–88 to 2010–11
Source: HM Treasury, Public Expenditure Outturns – key series update July 2009; HM Treasury, Public Expenditure Statistical Analyses 2009 and previous PESAs; ONS Blue Book. Forecasts from HM Treasury, Budget 2009.
Spending on education is driven by a combination of demographics and demand. Spending on primary
and secondary education, for example, is a function of the number of school-aged children. By contrast,
spending on higher education depends not only on the student-age population but also on how large a
22
proportion of that population goes to college or university. Figure 4.7 shows how the number of schoolaged children changed between 1946–47 and 1998–99.
Figure 4.7 Pupils in primary and secondary schools, 1946–47 to 1998–99.
Note: The minimum school-leaving age was increased from 14 to 15 in April 1947, and from 15 to 16 in September 1972.
Source: Office for National Statistics, Social Trends 30.
The rise in the school-age population from the 1950s until the mid-1970s was accompanied by increases
in education spending. Public spending on education began to stagnate in the 1970s, at the same time as
the number of schoolchildren began to decline. However, the link between education spending and
demographics may recently have become weaker: a rise in the number of school-age children in the 1990s
(from 6.6 million in 1990–91 to 7.3 million in 1998–99) resulted in only a relatively minor real increase in
education spending, and an increase in spending as share of national income of only 0.3 percentage points.
As with health, the Labour government has been substantially increasing the amount of public spending
on education. The average annual real increase in education spending was 1.5 per cent between April
1979 and March 1997, and 4.2 per cent between April 1997 and March 2009. Budget 2009 forecast that
real spending on education will rise by an average of 2.5 per cent a year from April 2009 to March 2011.
These spending increases are substantial and, if delivered, will see education spending as a share of
national income peaking at an all time high of 6.2 per cent in 2009–10.
Within education spending, local authorities (LAs) and devolved administrations are responsible for a
sizeable share of school expenditure. In England, LAs were responsible for between 40 and 43 per cent of
total education spending each year between 1997–98 and 2007–08. Prior to 2006–07, schools funding
was provided for in LAs’ general funding, based on the central government’s assessment of LAs’ school
spending needs. As of 2006–07, each LA’s school budget is provided by a central government specific
grant, known as the Dedicated Schools Grant (DSG). The DSG is based on a formula, with a guaranteed
minimum increase in per-pupil funding (set at 5 per cent in both 2006–07 and 2007–08), with the option
for LAs to top up spending with revenue from other sources if they wish.14
14
For more information on local government finance see S. Adam, C. Emmerson and A. Kenley, A Survey of Local Government
Finance, IFS Briefing Note 74, 2007 (http://www.ifs.org.uk/bns/bn74.pdf)
23
Figure 4.8. Education spending by function in real terms, England only: 1997–98 to
2008–09
Notes: The category ‘other’ includes capital spending on schools (only resource budget spending is broken down by age group) and
higher education student support. The category ‘Further education’ includes adult learning.
Source: Department for Children, Schools and Families, Departmental Report 2000, Cm. 7391, London, June 2009
(http://publications.dcsf.gov.uk/eOrderingDownload/DCSF-Annual%20Report%202009-BKMK.PDF).
Figure 4.8 shows a breakdown by function of education expenditure for England only by central and local
government for the period from April 1997 to March 2009. This is taken from the most recent Annual
Report of the Department for Children, Schools and Families (DCSF), but covers all education spending by
central and local government in England – including both that of the DCFS and of the Department for
Innovation, Universities and Skills (DIUS), the two departments that superseded the Department for
Education and Skills in 2007–08.
Overall, spending on primary and secondary schools accounts for only about half of total education
spending. The next largest spending items are further education and higher education, which in 2007–09
accounted for around 15 per cent and 12 per cent of education spending respectively, while spending on
the under fives accounted for just under 7 per cent. Figure 4.8 reveals that in England, under the current
Labour government, spending on further education has had the greatest proportional increase. From
1997–98 to 2008–09 it has grown by 123 per cent, which equates to an annualised average real growth of
7.7 per cent. Spending on the under fives experienced similarly rapid growth, growing by 84 per cent over
this period, which equates to an average annual rate of 6.1 per cent. The biggest single contributor to the
increase in total education expenditure has been secondary education, which accounts for £7.6 billion of
the £30.0 billion increase in education spending between 1997–98 and 2008–09, and which experienced
real average annual growth of 5 per cent. By contrast, average real annual growth in spending on higher
education was only 2.7 per cent over the same period, and student support for those in higher education
increased in real terms by an average of just 0.5 per cent per year.
Table 4.3 shows how the UK’s education spending in 2005 compared with that of five other major
economies. The UK spent a higher share of national income on education than Italy, Japan, Germany and
France, and a lower share than the USA. When considering how spending per student compares between
different countries it is important to consider that the incomes of the countries differ. Countries with
24
higher national income per capita may be expected to spend a higher amount on education per student
than a country with a slightly lower income per capita. For instance, the USA spends more per student
than the UK in all levels of education, but also has a higher income per capita, so that once this is adjusted
for, the differences in spending per student between the USA and UK are reduced quite significantly.
Similarly, the UK has a higher national income than Italy, Japan, France and Germany. This means that
once differences in income per capita are adjusted for, where these four countries spent less per student
than the UK this gap is reduced, and where these four countries spent more per student than the UK this
difference is increased. All the five countries spent more per student on secondary education than did the
UK, while Italy, Japan and the USA also spent more per student on primary education. Only the USA spent
more per student on tertiary education than the UK. The UK in 2005 therefore had a relatively low
preference for secondary education but a relatively high preference for tertiary education compared with
Italy, Japan, Germany and France. After adjusting for differences in national income, the USA spent 37 per
cent more per student on tertiary education than the UK, but only 9 per cent and 10 per cent more on
primary and secondary education respectively. The USA therefore exhibited an even greater preference
for tertiary education than did the UK.
Table 4.3. Spending on education in selected major economies, 2005
Education
spending,
% of GDP
Spending per student, relative to the UK
Spending per student per unit of
average income, relative to the UK
Primary
Secondary
All tertiary
Primary
Secondary
All tertiary
Italy
4.7
107
107
59
122
121
68
Japan
4.9
106
110
91
111
115
95
Germany
5.1
79
107
92
82
110
95
France
6.0
84
125
81
90
133
87
UK 6.2 100 100 100 100 100 100 USA
7.1
144
145
180
109
110
137
Notes: Indices for spending per student are taken from figures that were converted into US dollars using purchasing power parities.
Italy’s figures include only spending on public institutions.
Source: OECD, Education at a Glance, 2008.
4.4 Defence
Defence spending declined dramatically, both in real terms and as a share of national income, between the
mid-1980s and the end of the 1990s. The decline began shortly before the end of the Cold War, when the
UK’s five-year commitment to NATO to increase defence spending by 3 per cent a year ended. The decline
in real terms has been slowly in reverse since the end of the 1990s. Defence spending has been increased
to fund the ‘war on terror’ and UK military commitments in Iraq and Afghanistan. Despite the increase in
spending in real terms since the late 1990s, defence spending as a share of national income has continued
to decline, as a result of the strong economic growth experienced in the UK over this period. Defence
spending as a share of TME has also been in gradual decline since the late 1980s, falling from 10.4 per cent
in 1987–88 to 6.7 per cent in 1997–98, and reaching 5.9 per cent by 2008–09.
Figure 4.9(a) and 4.9(b) contain three series. The first, from 1953–54 to 1997–98, is total UK defence
spending, excluding spending on ‘non-cash’ items such as capital charges, depreciation, and changes in
provisions. The second, from 1998–99 to 2010–11, is total UK defence spending including these non-cash
items. These items account for a large proportion of defence spending, because the Ministry of Defence
(MoD) owns a large quantity of fixed assets such as buildings and machinery, which result in large capital
charges. For example, in 2008–09 the MoD had a total resource budget of £44.8 billion: non-cash items
25
made up about £15.4 billion, or 34.3 per cent, of that resource budget.15 The third series is the MoD DEL
(which includes non-cash items), for which there are projections of spending up to 2010–11. This series
follows a similar pattern to UK defence spending, but is of a slightly higher level, as not all MoD spending
is counted as UK defence spending.
Figure 4.9(a). Historical and forecast defence spending in real terms, 1987–88 to 2010–
11
Figure 4.9(b). Defence spending as a share of national income, 1987–88 to 2010–11
Sources: Historical data for UK defence spending are from HM Treasury, Public Expenditure Outturns – key series update July
2009, HM Treasury, Public Expenditure Statistical Analyses 2009 and previous PESAs. Projections for Ministry of Defence DELs
are from HM Treasury, Budget 2009.
Defence spending is difficult to forecast, because the costs of operations and conflict prevention fluctuate
significantly from year to year: in 2001–02 they were £586 million, but in 2002–03 they had risen to £1.4
billion. 16 When the UK fights wars, or deploys troops abroad, money sometimes has to be found at short
notice. The November 2002 Pre-Budget Report announced the creation of a special contingency reserve of
15
Sources: Tables 1.5 and 1.8 of HM Treasury, Public Expenditure Statistical Analyses 2009.
16
Source: Ministry of Defence, The Government’s Expenditure Plans 2007–08, Cm.7098, London, July 2007
(http://www.mod.uk/NR/rdonlyres/95BBA015-22B9-43EF-B2DC-DFF14482A590/0/gep_200708.pdf).
26
£1 billion ‘to meet overseas and defence needs in the fight against global terrorism’.17 The government
continued to maintain the special reserve in subsequent Budgets and Pre-Budget Reports up to the 2007
Pre-Budget Report, to make provision for the costs of military operations in Iraq and Afghanistan, as well
as the UK’s other international obligations. Since the 2008 Budget the government has not continued with
the special reserve, as the reduction in UK military commitments in Iraq and Afghanistan is expected to
make defence spending less difficult to forecast.
The MoD DEL is currently projected to decline in real terms between April 2008 and March 2011. This is
because the government has increased the MoD budget in 2008–09 and 2009–10 above what was planned
in the 2007 Comprehensive Spending Review to fund military operations, but has not yet made any changes
to the planned level of spending in 2010–11. The 2007 Comprehensive Spending Review planned for the
MoD budget to increase in real terms by an average 1.4 per cent a year over the three years 2008–09 to
2010–11. This increase in funding aimed to provide sufficient resources over these years to ensure that a
commitment to two new aircraft carriers and renewal of the Trident nuclear deterrent system would not
come at the expense of the conventional armed forces. The outlook for total public spending going
forwards is likely to place further pressure on the defence budget. A recent paper by Professor Malcolm
Chalmers – a former special advisor to foreign secretaries Jack Straw and Margaret Beckett – concluded:
‘What is clear is that, given the extent of savings that are likely to be required in the next Defence Review,
not all existing capabilities – far less legitimate aspirations for new capabilities – can be afforded. A
moment of choice for British defence decision-makers, as significant for its foreign policy as the decision
to withdraw from East of Suez in the 1960s, is fast approaching.’18
4.5 Public order and safety
Spending on public order and safety (POS) constituted 3.3 per cent of TME in 1978–79, and rose to 5.5 per
cent in 2008–09. POS includes the criminal justice system (which encompasses the police, the Crown
Prosecution Service, the criminal courts, and the prison and probation services), immigration and
citizenship functions and the fire services. Local authorities typically carry out over half of total spending
on these functions, which means that spending on POS cannot be planned or predicted for future years.
Figure 4.10(a) shows that POS spending grew steadily in real terms from April 1979 to March 1995, at a
real average annual rate of 4.7 per cent. This represents higher growth than in any of the other areas this
Briefing Note examines, including the NHS. After levelling off in real terms until around March 2000,
spending on POS in real terms has again grown rapidly, at an average annual real rate of 4.6 per cent
between 2000–01 and 2008–09. Since the early 2000s were a period of strong economic growth, spending
on POS as a share of national income increased to a much lesser extent. Over the whole period 1978–79 to
2007–08 spending on POS as a share of national income fluctuated around a very gradual upward trend,
increasing from 1.5 per cent in 1978–79 to 2.4 per cent in 2008–09.
17
Source: Page 3 of HM Treasury, Pre-Budget Report 2002, London, November 2002 (http://www.hmtreasury.gov.uk/prebud_pbr02_repindex.htm).
18
M. Chalmers, Preparing for the Lean Years, Future Defence Review Working Paper No. 1, Royal United Services Institute for
Defence and Security Studies, London, July 2009 (http://www.rusi.org/downloads/assets/FDR_Working_Paper_1.pdf).
27
Figure 4.10(a). Public order and safety spending in real terms, 1987–88 to 2008–09
Figure 4.10(b). Public order and safety spending as a share of national income, 1987–
88 to 2008–09
Source: HM Treasury, Public Expenditure Outturns – key series update July 2009; HM Treasury, Public Expenditure Statistical
Analyses 2009 and previous PESAs.
4.6 Debt interest payments
Net debt interest payments in 2007–08 were £23 billion, equivalent to 1.6 per cent of national income.
Debt interest payments are the cost of servicing public sector debt. This cost depends on three main
factors: the stock of debt; the cost of borrowing (the interest rate); and inflation. The greater the stock of
debt, or the higher the rate of interest payable on the borrowed funds, the greater will be the debt interest
payments. Also, since most UK government bonds are nominal rather than index-linked, the higher
inflation is, the more quickly will the real value of the debt stock be reduced, and the lower will be the real
borrowing cost. Higher inflation therefore reduces the real cost of servicing public sector debt.
How the level of debt and debt-servicing costs as a share of national income evolve over time also depends
on growth in national income. During periods of high (nominal or real) growth in national income, the
debt stock will decline rapidly as a share of national income. This phenomenon is evident during the
period from 1955 to 1970 in Figure 4.12.
28
Figure 4.11 shows how spending on debt interest has changed since 1955, and to put this in context
Figure 4.12 shows how the stock of debt has evolved over the same period. Figure 4.12 contains two
series for UK government debt: the preferred measure, public sector net debt, is available only back to
1973–74, but data on the less comprehensive measure of national debt are available prior to this. It is
clear that the series for debt levels and debt interest spending do not perfectly track one another,
reflecting the importance of the aforementioned factors in determining how a given stock of debt
translates into a debt-servicing burden at any point in time.
Figure 4.11 shows that spending on net debt interest payments increased from the early 1970s to the
early 1980s, while Figure 4.12 shows that the national debt as a share of national income actually fell. The
government ran deficits over this period, particularly during the recessions of the mid-1970s and early
1980s, but was able to do so without increasing debt as a share of national income. The high inflation of
the period meant that nominal national income growth was high, despite the recessions, and so the debt
burden was not increased. The higher spending on debt interest therefore stemmed not from the higher
debt stock, but from the higher costs of borrowing. Investors who had seen the real value of their
government bonds eliminated by inflation started demanding significantly higher nominal interest rates,
increasing the cost to the government of borrowing.
During the late 1980s inflation came down and public sector debt fell, and so spending on net debt
interest payments fell. In the recession of the early 1990s government borrowing increased, and in the
absence of the rapid increases in inflation seen in the 1970s public sector net debt as a share of national
income increased. Spending on debt interest payments therefore also increased quickly, though with
inflation remaining well below the levels seen in the 1970s, debt-servicing costs never reached their
levels. Debt-servicing costs started to fall again in the mid-1990s as both the debt stock and expected
inflation fell.
The 2008–09 recession has seen government borrowing increase rapidly, and the national debt is
projected to increase to 76.2 per cent of national income by 2013–14. The size of the increase is
significantly bigger than seen during previous recessions, for two main reasons. First, the current
government has chosen to use active fiscal policy in an attempt to reduce the impact of the recession,
which was not the case in the recessions of the early 1980s or the early 1990s. This comes at the cost of
greater government borrowing – and therefore debt – but this might be more prudent at the moment than
it was during previous recessions, as interest rates on government bonds are currently low. A decade of
low inflation, and investor confidence that the government and the Bank of England’s independent
Monetary Policy Committee are committed to maintaining low inflation in future, mean that investors are
currently willing to buy government bonds at low interest rates. The cost of borrowing to soften the
impact of the recession is therefore less than that faced by previous governments. Second, unlike the
recessions of the early 1970s, early 1980s and early 1990s, this recession is deflationary. Nominal
national income growth has been negative, and is forecast to be low in the immediate future. The
increased government borrowing has therefore led to a rapid increase in the national debt as a share of
national income. This rapid increase is projected to lead to an increase in spending on debt interest
payments, which are forecast to grow as a share of national income at an average annual rate of 12 per
cent between April 2009 and March 2014. However, whereas debt is forecast to grow quickly as a share of
national income to levels not seen since the 1960s, the spending on interest payments is forecast to
exceed only slightly the peak level spent during the 1990s, because the low cost of borrowing means that
servicing even such a high stock of debt is still relatively low.
29
Figure 4.11. Public sector net debt interest payments as a share of national income,
1955–56 to 2013–14
Source: ONS series ANLO and ANBQ, Financial Statistics Freestanding. Projections from HM Treasury, Budget 2009.
Figure 4.12. Public sector net debt as a share of national income, 1955 to 2013–14
Note: Years on the x-axis refer to calendar years for national debt and financial years for public sector net debt.
Source: Public sector net debt is from HM Treasury, Public Finances Databank. National debt data are from the Debt Management
Office (http://80.86.35.58/reportView.aspx?rptCode=D4A&rptName=37790042&reportpage=about).
The increase in spending forecast to be needed for debt interest payments over the coming years will put
pressure on other areas of government spending. In 2007–08 net debt interest payments accounted for
4.0 per cent of total government spending, whereas in 2013–14 they are forecast to account for 6.9 per
cent. There is also considerable upward risk to these forecasts of net debt interest spending. If the interest
rates payable on government debt were to rise, the proportion of public spending required to service this
debt could increase rapidly, further increasing the pressure on other spending areas. These medium-term
spending pressures are discussed in more detail in section 6.
30
4.7 Transport
Looking at Figure 4.13(a) and 4.13(b), one can see that transport spending peaked in the mid-1980s and
then fell substantially, before recovering to peak again in 1992–93. It then fell dramatically until March
2000, when it started to increase rapidly again, at an average annual real growth rate between April 2000
and March 2009 of 9.5 per cent. The 2007 Comprehensive Spending Review spending plans imply that,
under current inflation expectations, total UK transport spending will continue to grow in real terms, at an
average annual rate of 1.8 per cent, between April 2009 and March 2011.
Figure 4.13(a). Historical and forecast transport spending in real terms, 1978–79 to
2010–11
Figure 4.13 (b). Historical and forecast transport spending as a share of national
income, 1987–88 to 2010–11
Sources: HM Treasury, Public Expenditure Outturns – key series update July 2009; HM Treasury, Public Expenditure Statistical
Analyses 2009 and previous PESAs; HM Treasury, Budget 2009.
31
In the July 2004 White Paper, The Future of Transport, the government updated its Long Term Funding
Guideline for transport,19 and planned that the Department for Transport’s programme budget will grow
at an annual average rate of 2.3 per cent between April 2008 and March 2015. This was subsequently
confirmed for the years 2008–09 to 2010–11 by the cash plans made by the 2007 Comprehensive Spending Review20, and the period for which 2.3 per cent average annual real growth was planned was also
extended to 2018–19. The figures in the White Paper are calculated on a different basis from those in the
PESAs: they include only spending within the Department for Transport’s DEL, whereas the PESA series
includes all public spending on transport, regardless of which government department it came from.
However, as shown in Figure 4.13(a) and 4.13(b), the trends in the two series are broadly similar. If the
government sticks to its plans to continue increasing the Department for Transport’s DEL budget in real
terms from 2010–11, then transport spending will increase steadily until 2018–19, while as a share of
national income it is projected to fall gradually, as the economy is expected to grow at the long-run trend
rate of 2.5 per cent.
The government has ambitious plans to improve Britain’s transport infrastructure.21 It is not yet clear
whether the increases in public spending planned by the 2007 Comprehensive Spending Review and the
Long Term Funding Guideline will be sufficient to fulfil these aims. If not, the figures for public spending
on transport may need to be higher than those currently set out. However, the amounts allocated to
transport for the years post-2010–11 are not firm government commitments. They are likely to be revised
downwards in future Spending Reviews, given the spending restraints faced by the government in the
wake of the financial crisis, as is discussed in more detail in section 6.
4.8 Official development assistance
A final area of UK public spending where the government has a specific spending commitment is official
development assistance (ODA). This is expenditure in developing countries from all UK official sources
that is made at concessional financial terms and has the promotion of the economic development and
welfare of developing countries as the main objective.22 One of the Millennium Development Goals (MDG)
in 2000 was to address the needs of the least developed countries by providing more generous ODA for
countries committed to poverty reduction. Since 1970 the United Nations General Assembly has had a
target level of ODA from developed countries of 0.7 per cent of gross national income (GNI). The Labour
government made an election manifesto pledge in 2005, confirmed at the 2005 EU Summit in Gleneagles,
to spend 0.7 per cent of GNI on ODA by 2013 – two years ahead of the EU’s target.23
From Figure 4.14(a) it is clear that spending on ODA has increased rapidly in real terms since 2000 when
the MDG were introduced. ODA peaked in real terms in 2006 at £6.2 billion – caused in part by the
counting of major debt cancellations as ODA in 2006 – though as a share of GNI this still only equalled the
peak achieved in 1979 of 0.5 per cent. Spending on ODA fell sharply in 2007, as the one-off debt
cancellation could not be repeated in 2007, and there was negative spending on ODA by government
departments other than the Department for International Development (DFID).24 In the 2007 19
The government published its first Long Term Funding Guideline for transport in July 2000 in the Transport Ten Year Plan
(http://www.dft.gov.uk/about/strategy/whitepapers/previous/transporttenyearplan2000).
20
Although, as things have turned out, a higher outturn than expected in 2007–08, a slight reduction in the planned overall spend,
and the bringing forward of investment spending from 2010–11 have meant that average annual real growth over this period is
now projected to be significantly less than this.
21
See, for example, the ‘Executive Summary’ section of The Future of Transport, White Paper Cm. 6234, Department for
Transport, London, July 2004 (http://www.dft.gov.uk/about/strategy/whitepapers/previous/fot).
22
OECD Glossary of Statistical Terms (http://stats.oecd.org/glossary/detail.asp?ID=6043).
23
ODA is measured in calendar years, in accordance with the guidelines of the OECD’s Development Assistance Committee.
24
Negative ODA spending represents flows from developing countries to the UK, typically either as a result of loan repayments or
through the realisation of UK government overseas investments.
32
Comprehensive Spending Review the government planned for spending on ODA to increase to 0.56 per cent
of GNI (£9.1 billion) by 2010–11.
Figure 4.14(a). ODA in real terms, 1970 to 2008
Figure 4.14(b). ODA as a share of gross national income, 1970 to 2008
Source: Department for International Development, Statistics on International Development 2008, and DFID statistical release 23
March 2009.
33
5. Recent issues in public spending
5.1 Regional spending and the Barnett formula
As a result of the 1888 Goschen formula, the non-English territories of the UK have higher levels of
spending per person than England has. To address this perceived inequity, since 1978 spending
allocations for the various countries of the UK have been determined by the Barnett formula. The
formula is designed to apply proportionate shares of any cash increase (or decrease) in comparable
English spending automatically to Scotland, Wales and Northern Ireland as well. The proportions specified
in the formula are currently updated annually on the basis of mid-year population estimates. One of the
effects of this is that spending levels per capita will gradually converge across the UK (at least when cash
spending per head is rising over time in England). Because the non-English territories in the UK began
with higher levels of per-capita spending in most of the main spending areas, a budgetary increase that
brings up England’s spending at a certain real-terms rate will, by the mechanical operation of the formula,
bring up spending in the rest of the UK at a lower rate.
Table 5.1. Identifiable public spending per capita on services in the countries of the UK,
2008–09
England
Scotland
Wales
3,656
1,834
1,369
308
522
Northern
Ireland
3,883
1,835
1,446
306
715
Social protection
Health
Education
Transport
Public order and safety
3,144
1,774
1,330
341
502
3,522
1,986
1,485
536
531
Total
7,971
9,538
UK
3,222
1,796
1,349
355
512
9,162
10,003
8,219
Source: Table 9.15 of HM Treasury, Public Expenditure Statistical Analyses 2009.
Public spending per capita in 2008–09 for several of the main services is shown in Table 5.1. Total
‘identifiable’ public spending on services25 was £7,971 per capita in England, £9,162 in Wales, £9,538 in
Scotland, and £10,003 in Northern Ireland. Some of this disparity in public spending per capita across the
regions may be explained by reasons unrelated to intentional regional policies. For example, some public
services might require more spending in non-English territories than in England to achieve the same
standard of public service, because service quality depends on population density, which is higher in
England than elsewhere. Emergency healthcare, for instance, is harder to deliver to a widely dispersed
rural population than to a metropolitan one. Likewise, low-density areas require more primary and
secondary education spending than do high-density ones if pupils are to live within reasonable distances
of a school. Another factor might be differences in underlying conditions, such as the health of countries’
populations. For example, age-standardised mortality rates in Scotland are higher than those in most
regions of England.26 So this might justify Scotland having higher healthcare spending per capita than
England. Payments in other spending areas, such as social protection, are made on the basis of individuals’
incomes and circumstances.
25
This means spending that could be meaningfully apportioned by country according to which country benefitted, as opposed to
spending on, for example, a nationwide public good such as defence.
26
Source: Office for National Statistics, Population Trends, No 134, Winter 2008, Map 2, page 18
(http://www.statistics.gov.uk/downloads/theme_population/Population-Trends-134.pdf).
34
To date, the Barnett formula has been used to allocate spending to the various countries of the UK only in
an environment of overall spending growth. However, given the squeeze on total public spending that the
government has pencilled in for April 2011 to March 2014, and the further tightening that will be required
in subsequent years if government borrowing and the national debt are to be brought back to reasonable
levels, we are likely to start seeing cash cuts to the budgets of UK departments. These cuts could feed
though the Barnett formula, resulting in a reduction in the budgets allocated to the devolved
administrations. A side effect of applying cash spending cuts to budgets in England, but only a proportion
of such cuts across Scotland, Wales and Ireland (as implied by the Barnett formula), is that spending levels
per capita will start to diverge across the UK, as the devolved countries will receive lower spending cuts
than England. An alternative for the UK government, given the serious spending restraint needed over the
near future, could be to simply adjust the budgets of the devolved countries without reference to the
Barnett formula as part of a uniform reduction in the budgets of all departments. In A Statement of Funding Policy (2007) the Treasury stated:27
the United Kingdom Government continues to reserve the right to make across-the-board
adjustments to the budgets for the devolved administrations in the cases of a uniform
general adjustment to public expenditure programmes of departments of the United
Kingdom Government.
The government could then choose to redistribute any ‘savings’ to UK departments, which would
consequently increase the budgets of the devolved countries through the Barnett formula, but overall this
would disadvantage the devolved countries, as the hand-back would be based on population proportions
while the cuts were uniform.
The Scottish Parliament – unlike the National Assembly for Wales – also has the power to increase (or
decrease) the level of public spending by raising (or lowering) the basic rate of income tax. To date this
power has not been exercised. Both the Scottish Parliament and the National Assembly for Wales have the
power to allocate spending on certain public services as they see fit: for example, they could choose a
different trade-off between spending on education and spending on the NHS than England. A more
detailed description of this, and of how spending is allocated to local authorities within England, can be
found in Adam, Emmerson and Kenley (2007).28
5.2 Public sector investment
Figure 5.1 shows the evolution of public sector investment as a share of national income since the Second
World War, and highlights the magnitude of the decline that occurred after 1974. The graph shows that
the first ‘wave’ of decline in public sector investment, in the 1970s, was attributable to the fall in
investment by local authorities. The main causes of this drop in LAs’ investment were the transfer of
public housing to private ownership and the decline in the building of new council houses. Public
corporations were the chief source of the next wave of public investment decline, owing to the
privatisation of nationalised industries and utilities in the 1980s. The third wave reflects a squeeze in
central government investment from 1991 to 2000.
27
HM Treasury, Funding the Scottish Parliament, National Assembly for Wales and Northern Ireland Assembly: Statement of
Funding Policy, October 2007, paragraph 3.2 (http://www.hm-treasury.gov.uk/d/pbr_csr07_funding591.pdf).
28
S. Adam, C. Emmerson and A. Kenley, A Survey of Local Government Finance, IFS Briefing Note 74, July 2007
(http://www.ifs.org.uk/publications/4004).
35
Figure 5.1. Gross fixed capital formation by the public sector as a share of national
income, 1948 to 2008
Notes: The data in 2005 are adjusted for the transfer of nuclear reactors from British Nuclear Fuels (a public corporation) to the
Nuclear Decommissioning Authority (classified as central government).
Source: UK Economic Accounts, series NMOA, NMES, FCCJ and BKTL.
The Labour government, on coming to power in 1997, argued that this decline in investment resulted in
an accumulation of overdue maintenance work on the public sector’s assets. Specifically, the 2002 Spending Review Departmental Investment Strategies: A Summary referred to estimated backlogs in 1997
of ‘in excess of £7 billion in schools; over £3 billion for NHS buildings; up to £6.75 billion on local authority
roads; and £10 billion on council housing’.29 As well as offsetting the depreciation of existing government
assets, the government also wanted to invest in new assets to fulfil its aim of creating ‘world class public
services’. To this end the government increased public sector investment from 2000 onwards and, as can
be seen in Figure 5.1, investment by central and local governments has been increasing since the early
2000s.
Figure 5.2 shows the distribution of public sector investment, as measured by gross capital spending, to
different functions in 2008–09. Together transport and housing account for around 40 per cent of gross
capital spending, while health and education represent a further 25 per cent. Defence accounts for a
relatively small proportion (6 per cent) of investment using this measure, because single-use military
equipment (MOD assets that cannot be put to a civilian use) are not counted as capital in the National
Accounts.
29
Page 5 of HM Treasury, 2002 Spending Review Departmental Investment Strategies: A summary, Cm. 5674, London, December
2002 (http://www.hm-treasury.gov.uk/d/dis_whitepaper02.pdf).
36
Figure 5.2. Composition of public sector gross capital spending in 2008–09
Note: Uses the National Accounts definition of capital.
Source: Table 5.4 of HM Treasury, Public Expenditure Statistical Analysis 2009.
As well as increasing conventional public sector investment (shown in Figure 5.1) the government also
increased investment under the Private Finance Initiative (PFI). PFI is a means of using private finance
and skills to deliver capital investment projects, typically infrastructure, that would traditionally be
provided by the public sector. Under traditional public sector investment the public sector body purchases
the capital assets and then owns, operates and regulates them. Under PFI a private sector firm or
consortium would procure the assets, own them and operate them, leaving the public sector only the
regulatory role. The private sector funds the investment, and any associated ongoing services such as
maintenance, while the public sector pays an annual user charge to cover rent and the cost of any ongoing
services provided. Part of any PFI contract specifies that the private sector must take on a considerable
proportion of the risks associated with the project, such as cost overruns and lower-than-expected
revenues from user charges.
Figure 5.3 illustrates the relative importance of PFI compared with other public sector investment. The
series used in this graph differs slightly from that in Figure 5.1. It is on a financial-year, not a calendaryear, basis, and it includes proceeds from the sale of fixed assets, whereas the figures for gross fixed
capital formation have asset sales deducted. Also, unlike Figure 5.1, it includes projected public sector net
investment and investment to offset depreciation to 2013–14, though figures for PFI spending and
investment to offset asset sales are not available for this period.
37
Figure 5.3. The components of gross publicly sponsored investment as a share of
national income, 1979–80 to 2013–14
Sources: PFI figures up to 2007–08 are taken from HM Treasury, PFI Signed Projects List – April 2009 (http://www.hmtreasury.gov.uk/d/pfi_signed_projects_list.xls). PFI figures for 2008–09 are taken from Tables 2.4 and 2.5 of 2008 Pre-Budget
Report: The economy and public finances – supplementary material. PFI figures for 2009–10 onwards are taken from Tables 2.5
and 2.6 of Budget 2009: The economy and public finances: Supplementary material. Depreciation and PSNI data were provided
by the HM Treasury Public Finances Databank, July 2009. Asset sales are from HM Treasury, Public Expenditure Statistical
Analyses and HM Treasury. PSNI projections are from Table C5 of HM Treasury, Budget 2009.
Figure 5.3 shows that public sector net investment increased between 2000–01 and 2008–09 from 0.5 per
cent of national income to 2.6 per cent. However, total publicly sponsored investment (i.e. including
investment to offset asset sales, investment to offset depreciation, and PFI that is not already ‘on balance
sheet’ as public sector investment) is still relatively low. The PFI delivers a larger share of publicly
sponsored investment now than it did when it began in the early 1990s. Off-balance-sheet PFI accounted
for 12.6 per cent of public sector investment in 2007–08 compared with 9.6 per cent in 1997–98.
However, its total size is still low: off-balance-sheet PFI represented 0.6 per cent of national income in
2007–08, relative to total publicly sponsored investment of 4.4 per cent. It is worth noting that the figures
use total PFI capital spending broken down into the year in which the deal was signed, rather than that in
which the capital spending was necessarily undertaken. So the amount of PFI investment that has taken
place to date may be overstated, because investment for projects that were signed in a given year may
materialise only in later years. But even without taking this into account, the magnitude of actual PFI
investment is insignificant relative to the historical decline in public sector investment since the late
1970s, and the deals signed to date have made only a modest contribution to the rise from the investment
‘trough’ of 1999–2000.
Table 5.2 gives the government projections for PFI in 2009–10 and 2010–11. PFI is expected to increase to
£10.2 billion in 2009–10, but fall to £9.5 billion in 2010–11. Despite the government’s frequent claims of
the importance of protecting investment spending despite short-term funding pressures, the current
recession appears to have halted the government’s plans to increase investment spending. The sharp
increase in investment spending forecast for 2008–09 and 2009–10 is due to the government bringing
38
forward some investment spending from 2010–11 in an attempt to stimulate the economy during the
recession.30 Public sector net investment is then forecast to fall rapidly from 2010–11.
Table 5.2. Projection of estimated capital spending by the public sector under both
conventional finance and PFI, by year and status of contract
Total signed deals, £bn
Total at preferred bidder stage, £bn
Total PFI investment, £bn
Public sector gross investment, £bn
Total publicly sponsored gross investment, £bn
PFI investment as a percentage of total publicly
sponsored gross investment, %
2009–10
4.5
5.7
10.2
63.4
71.7
2010–11
3.5
6.0
9.5
56.9
64.6
14.2
14.7
Note: The PFI figures do not include PFI projects undertaken by public corporations. The value for ‘total publicly sponsored gross
investment’ assumes that 19 per cent of PFI spending on future projects will be ‘on balance sheet’, i.e. already counted as public
sector investment. The figure of 19 per cent is based on the proportion of current PFI projects that are ‘on balance sheet’.
Sources: Tables 2.4 and 2.5 of HM Treasury, Budget 2009: The economy and public finances: Supplementary material, and Table
B10 of HM Treasury, Public Finances Databank, July 2009.
It is possible that the government is hoping to compensate for the future fall in public sector net
investment with an increase in PFI spending. However, recent troubled experiences with PFI projects may
make this difficult, for two reasons. First, it appears that financial risk may not be transferred as
effectively to the private sector under PFI contracts as was expected: when Metronet, the PFI company in
charge of upgrading much of the London Underground network, went into administration in 2007 the
upgrade works were brought into the public sector, leaving the government to pick up the cost overruns.31
Second, the credit crunch has increased the cost of private borrowing, which will make it more difficult for
a potential PFI provider to offer value for money relative to a conventionally financed project. This has led
to the Treasury lending to PFI companies.32
On the basis of the deals that have currently been signed, estimated annual payments for services
provided under the PFI will peak in nominal terms at £8.5 billion in 2017–18 and decline to £2.2 billion by
2039–40. Of course, these figures do not represent the final amounts of PFI payments until March 2040,
because more deals are expected to be signed by then.
5.3 How ‘firm and fixed’ are the Spending Reviews?
Since their introduction in April 1999 the spending limits set by DELs have typically acted more as ‘firm
floors’ than the firm spending totals they were intended to be. The government has been able both to top
up total spending plans in the Budgets and Pre-Budget Reports following the Spending Reviews, and in
some years reallocate spending from AME to DELs when demands on, for example, social security have
been lower than expected. This means that many departments frequently had their DELs revised upwards.
For example, the NHS received additional funds every year between 2000–01 and 2004–05, and defence
enjoyed a significant increase in its DEL budget each year between 2004–05 and 2007–08.
30
HM Treasury, Pre-Budget Report, November 2008, paragraphs 6.12 and 6.13.
31
In February 2008 the Transport Secretary, Ruth Kelly, announced a £1.7 billion grant to London Underground Limited (LUL), a
subsidiary of Transport for London (a local government body), to cover the costs associated with Metronet going into
administration. Hansard (House of Commons Debates), 6 February 2008, Col. 74WS to Col. 76Ws
(http://www.publications.parliament.uk/pa/cm200708/cmhansrd/cm080206/wmstext/80206m0002.htm).
32
On 3 March 2009 the government set up the Treasury Infrastructure Finance Unit to lend to PFI projects that cannot raise
sufficient debt finance. Source: HM Treasury, Budget 2009.
39
Table 5.3 shows (for each period covered by Labour’s Spending Reviews) the original plans for real-terms
increases in spending, the real-terms increase in spending implied by the cash plans once actual inflation
outturns are taken into account, and the actual real increases in spending that were delivered.
Table 5.3. Spending Review plans and eventual outturns
Average annual increase (%) CSR 1998 (April 1999 to March 2002) Original plans Adjusted for actual inflation Latest outturn Spending Review 2000 (April 2001 to March 2004) Original plans Adjusted for actual inflation Latest outturn Spending Review 2002 (April 2003 to March 2006) Original plans Adjusted for actual inflation Latest outturn Spending Review 2004 (April 2005 to March 2008) Original plans Adjusted for actual inflation Latest outturn CSR 2007 (April 2008 to March 2011) Original plans Adjusted for forecast inflation Latest forecasts TME
DELs
AME +2.7
+3.4
+3.7
+3.3
+3.9
+5.8
+2.2 +2.9 +0.6 +3.2
+2.9
+4.9
+5.1
+4.8
+6.2
+0.5 +0.3 +2.6 +4.3
+4.3
+4.9
+5.3
+5.3
+5.3
+3.0 +3.0 +4.5 +3.2
+3.3
+3.2
+4.1
+4.2
+4.0
+2.0 +2.2 +2.1 +2.0
+3.2?
+4.7?
+2.0
+3.2?
+2.8?
+2.0 +3.2? +7.4? Sources: Spending plans are from HM Treasury, 1998 Comprehensive Spending Review, Cm. 4011, July 1998; HM Treasury, 2000
Spending Review, Cm. 4807, July 2000; HM Treasury, 2002 Spending Review, Cm. 5570, July 2002; HM Treasury, 2004 Spending
Review, Cm. 6237, July 2004; HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, Cm. 7227, October
2007. GDP deflators from HM Treasury website (http://www.hm-treasury.gov.uk/d/gdp_deflators.xls), correct as of 30 June 2009.
Latest spending estimates are from HM Treasury, Public Expenditure Outturns: Key series update July 2009; HM Treasury, Public
Expenditure Statistical Analyses 2009 and previous PESAs.
The periods covered by the 1998 Comprehensive Spending Review and the Spending Reviews of 2000 and
2002 saw much fast growth in total spending than was originally planned for. For instance, adjusting for
actual inflation, the spending plans announced in the CSR 1998 implied that TME would grow at 3.4 per
cent, whereas the latest figures show it actually grew at 3.7 per cent. In the CSR 1998 period the faster
than planned growth was due to higher than planned DEL growth. AME grew significantly slower than
planned because of sharp falls in the cost of social security benefits for those out of work due to the strong
economy, and reduced public sector net debt interest payments (due to reduced borrowing and falls in
interest rates, as discussed in Section 4.6). This allowed the government to reallocate some planned
spending from AME to DELs. By contrast, in both the 2000 and 2002 Spending Review periods the faster
than planned growth in TME was due largely to higher than expected AME growth, caused by
discretionary increases in the generosity of tax credits and payments to lower-income pensioners. In the
Spending Review 2000 period the DEL budget was also topped up, and by substantially more than would
have been needed just to compensate for the higher-than-anticipated inflation.
The 2004 Spending Review period saw spending outturns very similar to what was actually planned in the
Spending Review. Spending in 2004–05 (the year prior to the start of the 2004 Spending Review period)
turned out to be higher than anticipated at the time of the Spending Review, meaning that real growth
40
outturns over the subsequent Spending Review period were the same as those planned (or in the case of
DELs slightly lower) despite the lower-than-expected inflation. This period also saw the first significant
downward revision to planned DEL spending. This was in Budget 2007, when then Chancellor Gordon
Brown discreetly reduced the Department of Health’s capital budget for the coming financial year (2007–
08) from £6.2 billion to £4.2 billion, a move justified on the basis that the NHS in England had failed to
spend all of its capital budget in the previous year (2006–07). 33
The 2007 Comprehensive Spending Review period is the first time the system of setting three-year DELs
has been tested in a period of weak economic growth. The lower-than-expected inflation rates mean that
the cash spending plans from the CSR 2007 now imply much faster real growth over this period than was
originally planned. There is also now projected to be much higher cash spending on AME than was
originally projected, owing to rising social security and benefit payments during the recession. In terms of
departmental spending, the government has been keen to be seen to be honouring the spending plans
fixed in the CSR 2007, and has not explicitly made significant cuts to planned departmental spending.
However, the capital budget of the NHS in 2010–11 was discreetly reduced,34 and the government has
claimed to have identified £5 billion of further ‘efficiency savings’ across the current budgets of
government departments, which it expects to be delivered in 2010–1135, so in effect planned spending has
been reduced. The government also brought some planned investment spending forward, from 2010–11
into the preceding two years, to help stimulate the economy. These three factors mean that departmental
cash spending plans for 2010–11 have been reduced slightly since the CSR 2007. However, the latest
forecast for real DEL growth over this period is still higher than the original planned growth, as a result of
lower-than-forecast inflation.
The recent period of lower-than-expected inflation and the need to control public spending in order to
bring government borrowing back under control (see Section 6 for more detail) have led to a slightly new
debate: how firm and fixed should the Spending Reviews be? In periods when inflation is lower than
expected, the cost of procurement in the public sector could also be lower than was expected when
departmental budgets were planned. Thus, in theory, departments should be able to deliver the same
services but for a lower total budget. If this is the case then there may be an argument in favour of the
government being able to reduce departmental cash budgets slightly in times of lower-than-expected
inflation, thus reducing total government spending without reducing the planned quantity or quality of
public services. While this may seem desirable, how plausible it is depends on the government’s ability to
identify the rate of inflation faced by different departments. For instance, labour-intensive departments
may not benefit from lower general price inflation if the rate of wage inflation is not reduced to the same
extent. Moreover, increasing use of multi-year pay deals in the public sector will reduce the extent to
which wage costs will be lower (or higher) than expected, at least in the near term.
5.4 Departments’ use of end-year flexibility
As mentioned in Section 3, government departments no longer have to forgo any money that they fail to
spend, and can instead accrue an end­year flexibility (EYF) entitlement to all of their unspent DELs.
33
This cut was not picked up on for some time. See C. Giles and N. Timmins, ‘Brown cut budget for English hospitals’, Financial
Times, 30 June 2007 (http://www.ft.com/cms/s/0/d594d736-26a6-11dc-8e18-000b5df10621.html?nclick_check=1), three
months after the Budget. This is not surprising, given that the relevant paragraph outlining the cut in the Budget reads as follows:
‘Changes in public sector net investment in 2007–08 are a result of revised forecasts for local authority self-financed capital
spending, and the updating of local government DEL and DH capital plans to a level consistent with the latest estimates of outturn
spending, excluding exceptional items. This reflects changes to the balance of DH capital procurement and technical, classification,
and other changes. Capital underspends will be rolled forward as end year flexibility and NHS and local authority spending plans
will be unaffected’ (Paragraph C75, page 288, of Budget 2007).
34
HM Treasury, Pre-Budget Report 2008, p. 214: ‘The 2010–11 capital figures reflect changes including updating Department of
Health’s capital plans to a level consistent with the latest planned spend.’
35
HM Treasury, Pre-Budget Report 2008, p. 107; and HM Treasury, Budget 2009, Table 6.1.
41
Departments have taken advantage of this ability. It is estimated that their combined cumulative
underspend at the end of 2008–09 is £20.5 billion. This equals 5.3 per cent of total DEL for 2009–10, or
3.1 per cent of TME. The Department of Health has the largest cumulative EYF entitlement in 2009–10, of
some £5.2 billion. The top five cumulative underspenders are shown in Table 5.4.
Table 5.4. Cumulative underspending by the five departments with the largest EYF
‘carry-forward’ to 2009–10
DoH
DfCSF
ECC
Home Office
DIUS
Other depts.
Total depts.
Cumulative DEL underspending, £bn
Resource
Capital
Total
3.7
1.6
5.2
1.1
2.4
3.5
1.0
0.1
1.1
0.3
0.8
1.1
0.8
0.2
1.0
6.0
2.5
8.6
12.9
7.6
20.5
Total planned DEL
2009–10, £bn 104.5
56.6
3.1
10.0
19.7
193.2
387.1
Underspend as a %
of 2009–10 DEL 5.0
6.2
35.5
11.0
5.1
4.5
5.3
Notes: DoH is the Department of Health; DfCSF is the Department for Children, Schools and Families; ECC is the Department of
Energy and Climate Change; DIUS is the Department for Innovation, Universities and Sills. DIUS and BERR were merged in June
2009 to form the new Department for Business, Innovation and Skills (BIS), and their EYF carry-forward will be consolidated to give
BIS an EYF entitlement of £1.6 billion in 2009-10.
Sources: Underspending figures are from Table 6 of HM Treasury, Public Expenditure 2008–09: Provisional Outturn; planned DELs
are taken from HM Treasury, Public Expenditure Statistical Analyses 2009.
While the absolute sums of money that departments have accumulated are relatively small compared with
overall public spending, Table 5.4 shows that in some cases they are large when considered as a
percentage of individual departments’ DELs. One possibility is that these accumulated underspends will
influence the amount of money departments receive in the next Spending Review period. The
departments listed in Table 5.4 have large EYF entitlements, which they could in theory spend at any time.
While the government may not want to penalise departments that have chosen to save in the past, it is
hard to see how they will not take accumulated EYF entitlements into account when planning spending
settlements for the next Spending Review period, since the constraints on overall spending growth are so
tight (see Section 6). While this may enable the government to prioritise its spending better during the
next Spending Review period, it would probably come at the cost of restoring an incentive for
departments to rush spending inappropriately for fear of losing future allocations.
When departments choose to underspend in a given year, total public sector spending will be lower than
planned by the government, leading to government borrowing being lower than what was planned. When
departments choose to take up their EYF entitlement their DEL will be increased, subject to parliamentary
approval of any necessary Supplementary Estimates. 36 Of the increases in DEL, some may be charged to
the DEL reserve, while some may require an increase in total public spending. If total public spending is
increased, while revenue from receipts remains as planned, then the take-up of the EYF entitlement will
require an increase in government borrowing in that year.
36
Supplementary Estimates are the means by which the government seeks from Parliament sufficient funds and authority for the
bulk of departmental expenditure. The Main Estimates are presented to Parliament in the Budget each year. Supplementary
Estimates are then used to seek additional resources, or to reallocate existing resources to new activities, and are presented in
June, November and February as required.
42
6. Future pressures on public spending
6.1 The government debt burden and medium-term spending plans
The financial crisis of late 2008 precipitated a sharp recession in the UK economy. The Treasury forecast
in Budget 2009 that the UK economy would contract by 3.5 per cent in 2009, although it also forecast a
quick recovery with positive growth from 2010 onwards. The Treasury also took the view that the global
credit shock had led to a permanent loss of trend output of 5 per cent between mid-2007 and mid-2010,
compared with the path anticipated in Budget 2008. This means that from 2010 onwards UK national
income will be 5 per cent lower than the Treasury had previously predicted.
The sharp reductions in economic growth resulted in a collapse in the revenue the government received in
2008–09 and the revenue expected in future years. Combined with an increase in government spending
on areas such as social security, this has resulted in a rapid increase in public sector net borrowing.
Borrowing rose from 2.4 per cent of national income in 2007–08 to 6.3 per cent in 2008–09, and is
forecast to peak at 12.4 per cent in 2009–10. This would be the highest level of borrowing by the UK
government in any single year since the Second World War. Under current spending plans for 2008–09 to
2010–11 borrowing will be 11.9 per cent of national income in 2010–11 and public sector net debt will
climb to 65 per cent of national income.
The next Spending Review period: 2011–12 to 2013–14
In Budget 2009 the Treasury set out tax and spending plans that would, assuming their economic
forecasts turn out to be correct, reduce real-terms public spending by £1.0 billion by 2013–14. These
discretionary spending cuts, combined with falls in certain other elements of spending (such as social
security payments) as the economy recovers from the recession, and increases in government revenues as
a result of economic recovery and new tax-raising measures, are expected to reduce overall government
borrowing from 11.9 per cent of national income in 2010–11 to 5.5 per cent of national income in 2013–
14.
The plans set out in Budget 2009 show that current spending would be increased by 0.7 per cent a year in
real terms between 2011–12 and 2013–14, while public sector net investment would be reduced to 1.25
per cent of national income by 2013–14 – equivalent to an average annual real reduction of investment
spending of just over 17 per cent between 2011–12 and 2013–14. The government claims that at least
part of these tight spending plans will be made possible by £9 billion of new efficiency savings identified
in existing departmental spending, which can be realised by 2013–14.
The plans for current and investment spending effectively imply that total government spending, after
economy-wide inflation, would be cut by 0.1 per cent between 2010–11 and 2013–14. This would be the
lowest three-year growth in public spending since the period from April 1996 to March 1999. Figure 6.1
shows how the real annual growth rates planned for 2011–12 to 2013–14 compare with the growth rates
seen in previous periods.
43
Figure 6.1. TME, current spending and investment spending
Source: Historical data and projections to 2010–11 from HM Treasury, Public Finances Databank, July 2009; projections for 201112 onwards from HM Treasury, Budget 2009, Table C4.
The real cut in spending of 0.1 per cent over three years is a very tight spending envelope. Some areas of
government spending are not under the government’s control (in the short term at least), and may
necessarily grow faster than this overall average rate. For instance, debt interest payments depend on the
stock of government debt and the interest rates on that debt. With the national debt forecast to reach 65
per cent of national income by 2010–11, and increase to 76.2 per cent by the end of 2013–14, debt
interest payments are a rapidly growing area of government spending. Internal Treasury forecasts drawn
up at the time of Budget 2009 (and subsequently leaked to the Conservative Party) imply that interest
payments would grow in real terms by an average annual rate of 11.1 per cent over 2011–12 to 2013–14.
Taking this into account would mean that the rest of public spending would be cut by an average 0.9 per
cent a year over this three-year period.
Other areas of non-departmental spending are also likely to be growing more rapidly than the total
spending envelope. Social security spending will be increasing: for instance, with an ageing population
there will be an increasing number of individuals receiving state pensions. This means that the spending
settlement for departments over the next Spending Review period is going to be even tighter than the
planned increases for spending as a whole, with significant real spending cuts likely for most central
government spending departments. The leaked Treasury internal forecasts suggest that departmental
spending will be cut on average by 2.9% a year in real terms over the three years 2011–12, 2012–13 and
2013–14.
The areas of departmental spending that are likely to be particularly affected are those that are capital
intensive, given that the plan for 2011–12 to 2013–14 is to cut real investment spending by an average
17.5 per cent per year. This cut in investment spending is in strong contrast to the Labour government’s
constant claims of the importance of protecting investment spending, despite short-term funding
pressures, in order to support long-run productivity.37 The planned cuts to investment spending are likely
to be of particular concern to capital-intensive departments such as Transport, and Communities and
Local Government (who are involved with local housing). Not only do these departments have a high
proportion of their DELs accounted for by capital (for example, in 2007–08 the Department for
Transport’s capital DEL, excluding depreciation, was 48 per cent of its total DEL), but they also account for
a significant proportion of total public sector net investment. As shown in Figure 5.2, of total gross public
37
See, for instance, HM Treasury, Planning Sustainable Public Spending: Lessons from previous policy experience, November
2000; and HM Treasury, The Government’s Fiscal Framework, November 2008.
44
sector investment, 22 per cent went on transport and 19 per cent went on housing. With public sector net
investment being reduced so significantly over 2011–12 to 2013–14, these departments will almost
certainly be adversely affected.
Spending from 2014–15 onwards
Under the plans for taxes and spending forecast by the Treasury in Budget 2009 for 2011–12 to 2013–14, public sector borrowing would be 5.5 per cent of national income in 2013–14, and public sector net debt
would have reached 76.2 per cent of national income. The Treasury indicated that a fiscal tightening of 3.2
per cent of national income over 2014–15 to 2017–18, combined with some further strengthening of the
public finances as the economy finally moved back to its trend level, would eliminate the current budget
deficit. Any government borrowing would then be needed only to fund public sector investment.
The tax year 2014–15 is well beyond the government’s normal planning horizon. It is beyond the next
Spending Review period, and could even be beyond the next parliament. It is therefore more than likely
that the required fiscal consolidation will change long before we get to 2014–15. However, supposing a
future government did plan for a 3.2 per cent tightening of national income over 2014–15 to 2017–18, if
this was all found by controlling spending it would imply average annual real growth in spending of 0.4
per cent a year over the four-year period. Alternatively, the government could choose to raise more tax
revenue. If half of the fiscal tightening came from spending and half came from taxes, this would imply
average annual real growth in spending of 1.4 per cent over the four years. The current era of tight public
spending plans is therefore likely to have to continue for some years to come.
6.2 Government policy commitments
The government also has a number of specific policy commitments that, if it maintains them, will have
implications for public spending over the near future.
Earnings indexation of the basic state pension
In the 2006 White Paper Security in Retirement: Towards a New Pensions System, the government stated
(p. 17):
During the next Parliament, we will re-link the uprating of the basic State Pension to
average earnings. Our objective, subject to affordability and the fiscal position, is to do this
in 2012, but in any event by the end of the Parliament at the latest.
There is no doubt that the fiscal position now expected for 2012 is considerably worse than was expected
in 2006, and so it seems possible that the re-linking will be delayed beyond April 2012. The Department
for Work and Pensions projected that implementing the change in 2012 would cost £0.7 billion in 2012–
13 and £1.4 billion in 2013–14. This would mean that total spending, less debt interest payments and
social security spending, would have to be cut in real terms by an additional 0.1 per cent on average each
year from 2011–12 to 2013–14, which would put even greater pressure on departmental spending over
the next Spending Review period.
Child poverty targets
The current Labour government has ambitious targets for child poverty, originally announced by Tony
Blair in 1999. The next target is that child poverty in the UK in 2010–11 will be one-half of its 1998–99
level, where being in poverty is defined as having less than 60 per cent of contemporaneous median
household income. Brewer et al. (2009)38 projected that under current policy there would be a fall in the
number of children in poverty in 2010–11 to 2.3 million children, implying that the government will miss
38
M. Brewer, J. Browne, R. Joyce and H. Sutherland, Micro-Simulating Child Poverty in 2010 and 2020, IFS Commentary 108, IFS,
London, 2009.
45
its target by 600,000 children. They also estimated that additional spending39 of around £4.2 billion a year
by 2010–11 would be required to meet the target. Given that Budget 2009 allocated less than £0.2 billion
toward meeting the 2010 child poverty target, it seems likely that this target will be missed.
The longer-term government target for child poverty is that it will be ‘eradicated’ in the UK by 2020. More
recently the government has proposed that a rate of relative income poverty of 10 per cent or below, a
level comparable to the lowest levels sustained in Europe, would be consistent with the eradication of
child poverty.40 The Child Poverty Bill was presented to Parliament on 11 June 2009 and, if legislated in its
current form, will legally bind the government to meet this target.41 Progress towards meeting this target
will depend on the evolution of the distribution of private incomes of families with children, on growth in
average incomes, and also on the generosity of social security benefits and tax credits paid to families with
children. The government is likely to have to find additional funding to reduce child poverty between
2010–11 and 2020–21 if it is to meet the target, especially given the likelihood that the 2010 target will be
missed. A recent estimate suggests that a further £19 billion, on top of that required to meet the 2010
target, would need to be found to meet the 2020 target.42 Therefore this target will put additional
pressure on public spending over the next Spending Review period (2011–12 to 2013–14) and the
subsequent years, which also have already had low spending growth pencilled in.
Official development assistance target
The government has an international commitment to spend 0.7 per cent of GNI on ODA by 2013, and the
opposition Conservative Party has also pledged to meet this commitment. Under current projections the
government needs to increase spending on ODA by about an average of 8 per cent a year between 2011–
12 and 2013–14 in order to meet the target. Since the level of spending on ODA is small, this increase
equates only to about an extra £2 billion (in 2009–10 prices). The additional funding is therefore likely to
be allocated despite the spending squeeze, as it may well be less than the reputational costs of breaking
the ODA commitment.
6.3 Longer-term spending pressures
Figure 6.2 shows the Treasury’s latest projections for spending in 2017–18 and 2057–58, compared with
estimates of spending in 2007–08. Between 2007–08 and 2017–18 the Treasury projects there will be an
increase in spending on education due to projected population increases, an increase in state pension
spending due to increases in life expectancy, an increase in health spending, and an increase in public
service pensions. Total age-related spending is forecast to increase by 1.6 per cent of national income.
These increases in age-related spending, which will be relatively hard to avoid since they are caused by
changes in demography, will make the forthcoming spending squeeze (discussed above) seem even
tighter.
39
On the per-child element of the child tax credit, and a new supplement for children in large families.
40
It is impractical to define ‘eradication’ as zero, partly because of fluctuations in incomes and the potential for incomes to be
misreported by survey respondents, and partly because there will always be a small number of individuals who fail to claim benefits
to which they are entitled.
41
Details of the legislation can be found at http://services.parliament.uk/bills/2008-09/childpoverty.html. A discussion can be
found in S. Kennedy and I. Townsend, Child Poverty Bill [Bill 112 of 2008-09], House of Commons Library Research Paper No
09/62, 30 June 2009 (http://www.parliament.uk/commons/lib/research/rp2009/rp09-062.pdf).
42
M. Brewer, J. Browne, R. Joyce and H. Sutherland (2009), Cost of cutting child poverty rises as families fall further below
poverty line, IFS Press Release, 18 February 2009 (http://www.ifs.org.uk/pr/cp2010_pr.pdf).
46
Figure 6.2. Latest HMT long-term spending projections
Notes: State pension spending is defined as the sum of the basic state pension, state second pension, pension credit, winter fuel
payments, over 75 TV licences, and Christmas bonus. Health spending is defined as gross NHS spending. Long-term care excludes
long-term care provided within the NHS, which is accounted for under Health. Total spending includes gross investment, but
excludes interest and dividends payments.
Source: Table 4.1, HM Treasury, Long-Term Public Finance Report: An Analysis of Fiscal Sustainability, March 2008
(http://www.hm-treasury.gov.uk/d/bud08_longterm_586.pdf).
The projections presented in Figure 6.2 suggest that public spending will increase to 44.5 per cent of
national income by 2057–58. This is due mainly to projected increases in spending on state pensions
(because of increasing life expectancy, and the baby boomers reaching retirement) and spending on
health and long-term care (owing to the costs involved in keeping an ageing population healthy).
47
7. Conclusions
Public spending (TME) accounted for 43.2 per cent of national income in 2008–09, the highest share since
the recession of the early 1990s. In part this reflects the current economic downturn, which has both
increased social security spending and reduced national income. However, even before the recession,
Labour had deliberately pushed spending significantly above the 38.2 per cent of national income that the
party recorded in its first year in power in 1997–98. Between 2004–05 and 2007–08 TME had remained
fairly stable at around 41 per cent of national income.
The largest single component of public spending is social security. Spending on social security benefits has
more than doubled in real terms between 1978–79 and 2008–09, and now accounts for over a quarter of
TME. It has fluctuated as a share of national income because of the link between spending on benefits and
the state of the economy, but the overall trend was one of substantial increase between the 1950s and
2000s. Prior to the recession in 2008–09, spending on social security spending had remained fairly
constant over the 2000s, at just over 11 per cent of national income. This is despite significant increases in
the generosity of benefits targeted at lower-income pensioners and lower-income families with children
over this period.
The NHS has also experienced significant increases in spending, as a share both of TME and of national
income, despite fluctuations in the rate of spending growth from one year to the next. In real terms the
amount spent on the NHS in 2008–09 is more than ten times greater than that spent in 1958–59. In 2008–
09 spending on the NHS accounted for 7.8 per cent of national income, compared with just 3.2 per cent in
1958–59, with particularly sharp increases since the turn of the century.
Spending on the other main public services (education, transport, defence, and law and order) has also
been increasing in recent years. Spending on education declined gradually as a share of national income
from 1978–79 to 1999–2000, but has since been rising. Public spending on transport as a share of national
income was halved from 1.6 per cent in 1978–79 to 0.8 per cent in 1999–2000, but has since increased,
reaching 1.5 per cent by 2008–09. Spending on public order and safety has risen steadily in real terms
since 1978–79, and reached 2.4 per cent of national income in 2008–09. Finally, spending on defence was
cut by an average 0.5 per cent a year in real terms between April 1979 and March 1997, but has since been
increasing in real terms. As a share of national income, however, spending on defence has been in almost
continual decline since the early 1980s.
While spending in most areas has grown steadily over recent years, the latest projections (from Budget
2009) suggest that public spending will be squeezed tightly over the next few years, and tough choices
will have to be made between spending priorities. In that event, the current government’s aspirations
with regard to the quality and quantity of public services are likely to have to be tempered. Providing real
increases in funding for the NHS in line with the recommendations of the Wanless Review, providing the
real increases in transport spending planned in the Long Term Funding Guideline for transport, earningsindexing the Basic State Pension, reducing child poverty to the lowest levels sustained elsewhere in
Europe, and increasing official development assistance – to name just some of the government’s
aspirations – cannot all be achieved without substantial reductions in public spending elsewhere. These
reductions would be difficult, and it is not clear that the spending increases listed above should come at
the expense of other public services and broader government objectives elsewhere.
The next Spending Review (and quite possibly also the one beyond that) is therefore likely to contain tight
settlements for all departments, even those that have previously enjoyed some protection in times of
lower spending growth. Spending restraint on this scale is not unprecedented, but it has been many years
since most public services experienced spending plans as tight as the ones that are likely to emerge from
the next Spending Review.
48
Appendix A. Glossary
Annually Managed
Expenditure (AME)
Spending that the government judges cannot reasonably be subjected to firm
multi-year limits set in advance. Includes, for example, spending on welfare
benefits and debt interest payments.
Barnett formula
A population-based formula that allocates a share of changes in planned
cash expenditure on comparable services in England to the devolved
administrations in Scotland, Wales and Northern Ireland. It was first used in
setting the Scottish Office budget as part of the 1978 Public Expenditure
Survey.
Capital charges
An annual charge reflecting the consumption of fixed assets (depreciation)
and the opportunity cost of tying up such assets (cost of capital), to ensure
that the full economic cost of departmental activities is measured.
Capital spending
Spending that adds to fixed assets, such as expenditure on new construction,
land, extensions and alterations to existing buildings, and the purchase of
assets such as plant and machinery. Single-use military equipment is
counted as capital spending in resource accounts but not in the National
Accounts.
Cost of capital
The opportunity cost of capital invested. Opportunity cost is the cost of a
resource in its best alternative use.
Current budget surplus
The difference between current receipts and current expenditure, including
depreciation.
Current expenditure
Spending on items that are ‘consumed’ in the year of purchase. Includes
most direct expenditure on public sector pay and service provision. Also
includes single-use military equipment, even where these items count as
capital spending in the resource accounts.
Current receipts
Revenue relating to activities in the current year. Includes direct and
indirect taxes, national insurance contributions, capital taxes, interest,
dividends and profits. Does not include the proceeds from the sale of assets.
Departmental expenditure
limits (DELs)
Plans for departmental spending over a three-year period. Includes most
spending by central government on public services.
Depreciation
A measure of the reduction in the value of an asset over the course of its life.
End-year flexibility (EYF)
The mechanism under which money that remains unspent from
departmental budgets at the end of the financial year can be carried forward
to future year’s budgets.
Gross domestic product
(GDP)
The value of goods and services produced by UK residents, including taxes
on products, expenditure on both home-produced and imported goods and
services, and the effect of subsidies. Deductions are not made for the
depreciation of assets. This is referred to as ‘national income’ in this
document.
Gross national income
The value of all goods and services produced in the UK in one year, plus
income earned by its citizens abroad, minus income earned by foreigners in
49
(GNI)
the UK and minus net taxes on production and imports.
Private Finance Initiative
(PFI)
A means of using private finance and skills to deliver capital investment
projects, typically infrastructure, that would traditionally be provided by the
public sector.
Public sector net debt
(PSND)
Stock of public sector’s financial liabilities at face value, minus its liquid
financial assets. Financial liabilities include government bonds (gilts), the
borrowings of banks classified by the ONS as public corporations, Treasury
bills, National Savings, and local authority debt. Liquid assets include cash,
foreign exchange reserves, bank and building society deposits, short-term
securities with an initial maturity of up to one year, and assets held by the
Bank of England.
Public sector net
investment (PSNI)
Capital expenditure (acquisitions less disposals) on tangible fixed assets
(such as buildings, plants and machinery, but excluding single-use military
equipment) and intangibles (such as software) plus capital grants, less
depreciation.
Public sector net
borrowing (PSNB)
The difference between current receipts and total managed expenditure
(TME) or, equivalently, the difference between the current budget surplus
and net investment. Calculated on an accruals basis, whereby transactions
are recorded when the economic activity took place; this does not
necessarily coincide with the timing of the cash flows.
Single-use military
equipment
Ministry of Defence assets that are suitable only for military purposes (such
as warships), as opposed to dual-use equipment, which can also be used for
non-military purposes.
Total managed
expenditure (TME)
The sum of public sector current expenditure, net investment and
depreciation.
Sources: HM Treasury, Public Finances Databank, July 2009; The Scottish Parliament, Public Finance: Glossary of Terms
(http://www.scottish.parliament.uk/business/research/pdf_subj_maps/smda01-02.pdf); Office for National Statistics
(http://www.statistics.gov.uk/hub/economy/government-receipts-and-expenditure/public-sector-finance/index.html); OECD,
Glossary of Statistical Terms, (http://stats.oecd.org/glossary/index.htm).
50