Brown polishes his Golden Rule

A general election must be in the offing. Both major political parties are trying to outbid each other with the savings they claim can be made from civil service job cuts and public sector efficiency gains. Gordon Brown upped the ante in July. In his Comprehensive Spending Review, he identified substantial savings he thinks are needed to keep his ambitious spending plans for public services on track without raising taxes or increasing borrowing.

The Chancellor now plans to axe about 84,000 Whitehall civil servants over four years, and up to 20,000 more from local, Welsh and Scottish government, plus relocating 20,000 others away from London. The Treasury believes administrative costs across Whitehall can be reduced by 6% a year in real terms, saving about £2bn. This is on top of the 2.5% annual efficiency gains announced in the Budget, which Brown says will make £20bn a year available by 2007-08 for frontline public services.

This biannual review sets out spending plans for the next three years. With the money he hopes to generate, Brown will be able to increase current spending by an average of 2.5% pa in real terms between 2006 and 2008, while public sector investment is set to rise from 2% to 2.25% of GDP in the period. By 2008, the government will be spending £580bn, or about £2.3bn every working day. This compares with £1.3bn a day 10 years ago.

Critics of the government usually make two telling points about Brown’s spending. First, they admit that while he showed great restraint in his early years in office, his spending has been growing faster than GDP in the past few years. This is absolutely true and so the government’s share of total spending has been edging upwards, from 37% in 1999 (admittedly a 30-year low) to an expected 41.5% in 2005. This has led to charges of a return to tax and spend Labour government but, viewed in an international context, they seem to be exaggerated.

Even with the recent acceleration, government spending in the UK remains low by European levels. The average for the EU15 is 47.4%, while in France, Finland, Denmark and Sweden the share is above 50%. Only in Spain and Ireland is the proportion of government spending to national income lower than in the UK. It would appear that Brown’s boost to the public sector has not put the UK at a competitive disadvantage and that the relatively low tax environment can be maintained.

A second and more valid criticism of the Chancellor is that his outgoings have been rising faster than his income and rather than curb spending he has chosen to increase borrowing to the point where he is now in danger of failing by his own standards. When he first went to the Treasury in 1997, aware of the contribution a stable fiscal regime makes to a stable economy, Brown introduced two stringent fiscal rules by which he has claimed he wants to be judged. If they are broken, he will have failed.

According to the Golden Rule, the government will only borrow to invest and not to fund current spending. This means that over the life of the cycle, the current budget has to be in surplus. The Chancellor started with a big advantage – the £23bn in the kitty that came from telcos for 3G licenses. This good start helped to offset subsequent deficits but he is now sailing dangerously close to the overall deficit mark. Every year since 2002, he has had to revise upwards his estimated borrowing, which leaves the cumulative surplus since 1999-2000 close to zero.

He is therefore at risk on two fronts. First, if growth is slower than he is forecasting, his tax receipts will be lower than he expects. Even if growth comes in on target, Brown still needs his job cuts and efficiency gains. Without pre-judging his efforts to reduce the headcount, it is worth pointing out that civil service numbers have exceeded Treasury plans in every set of annual public sector projections since 1999. Efficiency in the public sector is, moreover, hard to measure and the gains are likely to be statistically elusive. And his 2.5% pa efficiency gain across the public sector is a better rate of productivity growth than the private sector usually achieves.

There are grounds for scepticism. Failure means tax increases if he is going to maintain his spending (which he is) and wants to meet his Golden Rule (which he does). And a bigger issue has yet to be addressed. Brown has an unshakeable faith that the public sector is the best route for the £96 per household he is spending every working day. Perhaps people will be more convinced about value for their money if he hits his efficiency targets. l

– Dennis Turner is chief economist at HSBC.