Public spending

What is Public Spending?

Public spending is expenditure incurred by the "public sector" in the course of its activities. The public sector, in organisational and economic terms, is the sum of those parts of the economy formally under the control of or responsible to the state, including both central and local government.

The term "public spending" is most commonly used to refer to the aggregate sum of all public sector expenditures. As with most economic terms, there are many different ways of measuring public spending so conceived.

The Government's preferred measure is Total Managed Expenditure (TME), which describes all forms of expenditure made by central government, local authorities and public enterprises. This includes in particular spending on social services and benefits, health provision, transport, education, defence, debt interest, housing, judicial and protective services and employment.

In terms of budget planning and control, TME is the sum of Departmental Expenditure Limits (DEL) and Annually Managed Expenditure (AME) set by the Treasury.

Departmental Expenditure Limits are the budgets set for Departments of State and the Non Departmental Public Bodies and local authorities they are responsible for in the course of three-yearly Spending Reviews. They include provision for all firm spending plans for the Department, running and procurement costs, subsidies and grants paid to the private sector, capital depreciation and receipts, and reserves.

The Annual Managed Expenditure comprises Departmental spending programmes that cannot be reasonably restricted to three-year cycles (notably social security and public sector pension spending, tax credits, Common Agricultural Policy payments etc), "Locally Financed Expenditure" (council spending funded by council tax and other local sources), net payments to the European Union, and central government debt interest.

Background

Responsibility for spending monies raised from taxation and other sources has always been at the heart of the modern concept of government.

Prior to the 19th Century, this was principally a matter of funding the armed forces, with social improvement and economic development left largely in the hands of the private sector. The notion that the Government was responsible for improving the lot of the public for paternalistic reasons became established during the Victorian era, and accelerated in the first half of the 20th Century, with the growing influence of socialism and related doctrines.

The First and Second World Wars, unsurprisingly, pushed public spending as a proportion of Gross Domestic Product up dramatically (from under 15 per cent to over 45 per cent, and from around 25 per cent to over 60 per cent, respectively). After each, however, the "size" of government did not revert to its prewar state, with public spending undergoing two step-changes upwards - a phenomenon known as the "ratchet effect". The experience of the Second World War, in particular, was responsible for the birth of the modern "welfare state" and the National Health Service, each representing a massive expansion of state responsibilities and spending commitments.

Coinciding with a period of social democratic "consensus politics", the ascendancy of Keynesian economics in the postwar years up to around 1980, saw public spending treated as an instrument of macroeconomic management. This produced a volatile, but clearly upward trend until the mid-1970s.

The economic crises of the 1970s led in political terms to the eclipse of Keynesianism, and the revival of neoclassical liberal economics and monetarism under the Thatcher governments. From the mid-1980s to around 1999, the trend was downwards. Since then, it has risen again. Nonetheless, since the late 1970s, public spending as a proportion of GDP has remained between 48 per cent and 37 per cent.

Shortly after coming to power in 1997, Labour shifted the basis of financial management from one-year cycles to three-year cycles, in order to facilitate stability. Prior to the adoption of the current Spending Review process, public bodies had suffered from uncertainty about future allocations, making the planning of multi-year programmes difficult. Treasury rules about recovery of unspent funds at the end of the year also encouraged inefficient spending. Under the present system, funds can be carried over between years within the Spending Review period.

The fiscal strategy of the previous Labour government was based on five key principles as laid out in the government's "Code for Fiscal Stability 1998" - transparency, stability, responsibility, fairness and efficiency. These principles were in turn implemented through observance of two fundamental rules. The "Golden Rule"- stipulating that the Government would borrow only to invest and not to fund current spending, and the 'Sustainable Investment Rule' - which held that public sector net debt, all things being equal, would be maintained below 40 per cent of GDP over the economic cycle. Public Sector Spending frameworks were subsequently tailored in order to adhere to these targets.

The Coalition government elected in May 2010 stated that its most urgent priority was to tackle the UK's record deficit in order to restore confidence in the British economy and support the recovery. Subsequently the Chancellor, George Osborne, set out details of how the new Government intended to save £6.2 billion from spending during the 2010/11 financial year as a first step towards cutting the unprecedented £156 billion deficit.

The savings, which the Treasury and the Bank of England said were "feasible and advisable", would be found by cutting waste and low value programmes across government. In addition to £6.2bn of savings in non-protected departments, savings in health, defence and international aid would be reinvested in front line services in those departments. The autumn spending review published in October 2010 fixed spending budgets for each Government department up to 2014-15.

Controversies

Public spending is a controversial issue, not only in the basic matter of how much there should be, but also in terms of the details of its distribution and funding, and of how it is defined. The public sector forms a large part of the economy, and as such public spending has a major impact on the macro-economy, as well as on the day-to-day quality of people's lives.

Some economic theories have suggested that increasing public spending exercises a negative "crowding out" effect on private sector economic activity, and have opposed it accordingly.

Historically, in the language of Labour, more aggregate spending has been a good thing, while in the language of the post-Thatcher Conservatives, it has been a bad thing. This crude simplification does not do justice to the detailed positions of the parties and the related contemporary discussion. Each party has different priorities for spending - traditionally over the last 50 years, the Conservatives have supported higher defence spending, while Labour has not - which have little to do with a concern with "public spending" as such.

All parties, moreover, are committed to improving the efficiency of public spending. In recent years, for example, Labour emphasised its achievement in reducing the amount spent on servicing the National Debt, which made it possible for a greater proportion of public spending to be committed to frontline projects. Waste and excessive bureaucracy is a persistent political theme, with the Conservatives in 2004 claiming to be able to reduce public spending (and thereby, the tax burden) by £18 billion without affecting spending on services themselves.

Under the previous Labour government the greater use of the Private Finance Initiative as a means of funding public sector investment was controversial. PFI spending fell outside the parameters of accounting rules, enabling the Government, critics claimed, to conceal costs and liabilities "off the balance sheet". Controversial for similar reasons was the structure adopted for Network Rail, which resulted in the debt-laden company being treated by the Office for National Statistics as a private sector body, despite being underwritten by the Government.

The Coalition government elected in May 2010 found they had inherited "the largest budget deficit of any economy in Europe with the single exception of Ireland" and that for every four pounds spent, one pound was being borrowed. The new Government accused Labour of incompetence, claiming they had had "no credible plan" to reduce the unprecedented deficit and immediately embarked on a programme to cut spending by over £6 billion.

In response the Shadow Chancellor, Alan Johnson, accused the Coalition of having "peddled a series of myths to the British public" of which he said the most incredible was "that the biggest global economic crisis since the great depression is the fault of the previous government." He strongly criticised the new Government's spending plans, describing them as "the deepest cuts in public expenditure that have taken place in living memory", which he said would "turn into stark reality for people's jobs and services; their pensions, their prospects; their homes, and their families."

Statistics

The Chancellor, George Osborne, presented the Government's Spending Review on 20 October 2010, which fixes spending budgets for each Government department up to 2014-15.

Welfare: In the June Budget the Government announced that it would save £11billion per annum from welfare spending by 2014-15. To put welfare on an affordable footing, the Spending Review announces further savings of £7 billion, bringing total welfare savings to £18 billion per annum by 2014-15.

Education: The schools budget will increase in real terms in each year of the Spending Review period. But economies in other areas mean that there will be a total real reduction in Departmental resource spending of 3% by 2014-15. Following on from the decision to halt Building Schools for the Future (BSF), capital spending will be reduced by 60% in real terms by 2014-15. The average annual capital budget over the period will be higher than the average annual capital budget in the 1997-98 to 2004-05 period.

Health: In line with the Government's commitment to protect health spending, overall NHS spending will increase by 0.4% in real terms over the course of the Spending Review period. This includes a 1.3% increase in the resource budget, and a 17% decrease in capital spending. The administration budget will be reduced by 33%, and reinvested to support the delivery of NHS services.

Transport: Over the course of the Spending Review period, The Department for Transport will reduce resource spending by 21% in real terms, and capital spending by 11% in real terms. The Department's Administration budget will be reduced by 33%.

Communities and Local Government: The Department for Communities and Local Government announced today that over the course of the Spending Review period, DCLG's overall resource will reduce by 51 per cent in real terms by 2014-15. This includes the devolution of over £1.6 billion to local government, without which the reduction would have been 33%. Capital spending will reduce by 74%.

Business, Innovation and Skills: Over the course of the Spending Review period, the Department for Business, Innovation and Skills (BIS) will reduce its resource budget by 25 per cent. Taking into account anticipated receipts, the cut to capital spending by 2014-15 will be 44 per cent. The Department's Administration budget will be reduced by 40 per cent, including savings from abolition of the RDAs.

Home Office: Over the course of the Spending Review period, the Home Office will reduce overall resource spending by 23% in real terms, and capital spending by 49% in real terms. The police service must play their part in reducing the nation's deficit. Central government police funding will reduce by 20% in real terms by 2014-15. If Police Authorities were to choose to increase precept, part of council tax, at the level forecast by the Office of Budget Responsibility, the SR settlement means that on average police budgets would reduce by 14% in real terms over the next four years. The department's central administration budget will be reduced by 33% in real terms over the same period.

Justice: Over the course of the Spending Review period, the Ministry of Justice will make a 23% reduction in the resource budget, and a 50% reduction in capital spending. The Department's administration budget will be reduced by 33%.

Defence: Over the course of the Spending Review period, the Ministry of Defence (MOD) will reduce resource spending by 8% in real terms, and reduce capital spending by 8% in real terms. The Department's administration costs will also be reduced by 33%. The Department will make at least £4.3 billion of non-frontline savings, of which around £3 billion is planned from efficiency programmes, over the Spending Review period.

Foreign Office: Over the course of the Spending Review period the FCO will see a 24% real terms reduction in the resource budget, and a 55% real terms reduction in capital spending. The Department's Administration budget will be reduced by 33%. The settlement provides for an increase in the FCO's Overseas Development Assistance (ODA) spending to help meet the Government's commitment to dedicating 0.7% of Gross National Income to ODA by 2013 - the FCO's contribution to UK ODA spending will increase from around 2% in 2010/11 to around 2.4% in 2011/12. The settlement also continues to provide grants to both the World Service and the British Council, though at a reduced level. From 2014-15 the BBC World Service will be funded by the BBC, but the Foreign Secretary will retain his veto over any decisions to cut language services. Once the additional resources from the BBC are taken into account the rest of the FCO budget will only fall by 10% over the period.

International Development: This Spending Review meets the government's commitment to spend 0.7% of Gross National Income (GNI) on Official Development Assistance (ODA) from 2013. This is in line with the UK's international commitments to help those living in extreme poverty in our world. The aid budget will maintain its share of GNI for 2011 and 2012, and then increase to meet the 0.7% target from 2013. Over the course of the Spending Review period, the Department for International Development will increase resource spending by 35% in real terms, and increase capital spending by 20% in real terms. The Department's Administration budget will be reduced by 33%.

Environment, Food and Rural Affairs: Over the course of the Spending Review period, the Department for Environment, Food and Rural Affairs will reduce resource spending by 29% and capital spending by 34%. The Department's Administration budget will be reduced by 33%.

Culture, Media and Sport: Over the course of the Spending Review period, the Department for Culture, Media and Sport will reduce overall resource spending by 24%. The core DCMS capital budget will reduce by 32%. The total administration budget for the Department and its arm's length bodies will be reduced by 41%.

Energy and Climate Change: Over the course of the Spending Review period, the Department of Energy and Climate Change will reduce resource spending by 18% in real terms, and increase capital spending by 41% in real terms. The Department's Administration budget will be reduced by 33%.

Work and Pensions: Over the course of the Spending Review period, The Department for Work and Pensions will increase resource spending by 2% in real terms, with a 6% real terms reduction in capital spending. The Department's Administration budget will be reduced by 35%.

Scotland: Over the course of the Spending Review period the Scottish Government will reduce resource spending by 7% in real terms, and capital spending by 38% in real terms. It will be up to the Scottish Government to decide how to manage these reductions reflecting its own policies and priorities including its own programmes of greater efficiency and public sector reform. The settlement has been determined through the Barnett formula in the normal way. The Barnett formula provides the devolved administrations with a population based share of comparable changes in the provision to UK departments. The Scotland Office's resource budget will be cut by 25 per cent. The Department will also commence a programme of work to develop shared services with the Northern Ireland Office and Wales Office.

Wales: Over the course of the Spending Review period, the Welsh Assembly Government will reduce resource spending by 7% in real terms, and capital spending by 41% in real terms. It will be for the Welsh Assembly Government to decide how to manage these reductions reflecting its own policies and priorities including its own programmes of greater efficiency and public sector reform. The settlement has been determined through the Barnett formula in the normal way. The Wales Office's resource budget is being cut by 25 per cent. The Department will also commence a programme of work to develop shared services with the Scotland Office and Northern Ireland Office.

Northern Ireland: Over the course of the Spending Review period, the Northern Ireland Executive will reduce resource spending by 7% in real terms, and capital spending by 37% in real terms. The Government is confident, however, that Northern Ireland is still on course to invest £18bn by 2017-18 as set out in its Investment Strategy. It will be for the Northern Ireland Executive to decide how to manage these reductions reflecting its own policies and priorities including its own programmes of greater efficiency and public sector reform. The Northern Ireland Executive's settlement has been determined by the Barnett formula in the normal way.

Treasury: Over the course of the Spending Review period, HM Treasury will reduce resource spending by 33% in real terms, and capital spending by 30% in real terms. The Department's administration budget will also be reduced by 33%.

Revenue and Customs: Over the course of the Spending Review period, HM Revenue and Customs (HMRC) will make savings to reduce resource spending by 15% in real terms, and capital spending by 44% in real terms, with £900million of those savings then being recycled into additional work against tax avoidance, evasion and criminal attack. The Department's Administration budget will be reduced by 33%.

Cabinet Office: In line with the Government's determination to tackle Britain's deficit, the Cabinet Office has announced today that it will reduce its core resource budget by 35% in real terms, from £280m in 2010-11 to £200m by 2014-15. Over the course of the Spending Review period Department's Administration budget will be reduced by 33% with a 28% reduction in capital spending. On top of its existing responsibilities the Cabinet Office will also take a range of new responsibilities including electoral reform and running elections. In total this will mean that the Cabinet Office resource budget will increase by 28%.

Small and Independent Bodies: Over the course of the Spending Review period most small departments will deliver at least a 25% reduction in resource spending and a 46% reduction in capital spending. Overall small departments will reduce spending on admin by 33%.

Source: HM Treasury, Spending Review - October 2010


Total DEL expenditure (Resource DEL excluding depreciation plus Capital DEL) was
£363.9 billion in 2011-12, a fall of £11.1 billion or 3.0 per cent on the previous year in
nominal terms.

Total Managed Expenditure was £690.9 billion in 2011-12, an increase of 0.5 per
cent on the previous year in nominal terms. This is the lowest annual rate of increase
for the period covered by this release.

Total expenditure on services was £665.1 billion in 2011-12, an increase of 0.05 per
cent on the previous year in nominal terms. Expenditure on pay fell by 0.6 per cent,
the first fall in the period covered by this release.

Source: Treasury; Statistical Bulletin: Public Spending Statistics - October 2012
 

Quotes

"A balanced structural current budget and falling debt: our deficit reduction plan is on course.

"Mr Deputy Speaker, we will not waiver from it. To do so would risk a sudden loss of confidence and a sharp rise in interest rates – and we will not risk that.

"Instead we reinforce today our commitment to fiscal responsibility, not just this year – but in the years ahead."

Chancellor George Osborne: Budget statement - 2012