Last week’s announcement of the spending plans of the Labour government for the next three years marks the turning point in this government’s fortunes.
It reveals a return to the old Labour we all know of ‘tax and spend’ combined with the new Labour we are all getting to know of ‘spin and deception’.
Government spending is set to increase by 2.75% over and above inflation each year for the next three years. For the foreseeable future, the government will run a PSBR of between #4bn and #6bn.
It has abolished the highly successful ‘control total’ which did much to keep spending under control by separating out cyclical expenditure such as unemployment benefits.
This highly profligate announcement was presented as prudent by a careful use of words. Gordon Brown said he was running a ‘current surplus’ of #7bn, #10bn and #13bn over the next three years. He also said government debt was falling – as a proportion of GDP.
So how does this square with the PSBR? Well, it’s like this. The government has introduced a split between current and capital spending. Total revenue less current spending is in surplus. But when capital spending is included, which it must, the government is in deficit each year. Debt is rising but, as a proportion of GDP, it is falling.
The government’s assumptions in preparing its spending forecasts are dangerously optimistic. Unemployment is assumed to remain at its April 1998 level. This is likely to turn out to be an historically low level.
It has risen in both May and June of this year. The social security spending figure (amounting to one-third of government spending) is consequently likely to be wildly understated.
Growth is assumed to be 2% next year and 2.25% thereafter. The Ernst & Young ‘Item Club’ forecasts growth at 1%; Merrill Lynch forecasts 1.25%.
Wrong assumptions like these mean the figures overstate tax revenues. And inflation is over-optimistic at 2.5%. This figure has only been met once under this government – in May 1997.
The Spending Review is based on wrong assumptions. It is over-profligate, it is a return to tax and spend and consequently interest rates will remain unnecessarily high to the detriment of the economy as a whole.
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