5 Public Spending

Objectives

- to reduce public spending as a share of national income to below 40 per cent;

- to set the path of the Control Total at a level year by year to ensure that, over time, GGE(X) grows more slowly than the economy as a whole;

- to promote spending policies which improve the use of resources and the efficiency of markets throughout the economy;

- to increase the efficiency with which public services are delivered; and

- to move public sector functions into the private sector if that is where they can be most efficiently delivered; and to promote greater use of private finance, challenge funding and other partnerships with the private sector to improve the targeting and efficiency of public services.

5.04 Public expenditure, measured by the Government's expenditure target - GGE(X) - has been brought down from 43 1/2 per cent of GDP in 1992-93 to 41 1/4 per cent in 1996-97. Over the same period there has been an 8 1/2 per cent reduction in the real cost of central government administration.

5.05 The plans for public spending set out in this Budget, which cover the three financial years from 1997-98 to 1999-2000, build on these achievements and further the Government's overall objectives for public spending by:

- reducing public spending as a share of national income by 3 percentage points, bringing the ratio of public spending to GDP to 40 per cent in 1997-98;

- holding the average rate of growth of the Control Total to 1/2 per cent a year in real terms;

- increasing spending on priority areas, including education, the National Health Service and combating crime;

- stepping up the fight against abuse of social security benefits and legal aid and increasing resources for improving tax compliance;

- cutting running costs of central government by 7 per cent in real terms compared to 1996-97; bringing the cumulative real reduction to 15per cent since 1992-93;

- increasing the amount of investment undertaken through the Private Finance Initiative; and

- increasing the amount of private expenditure levered into public services, particularly in urban regeneration and housing.

The Control Total

Definition

1996-97

1997-98 to 1999-00

Table 5.1 The Control Total

	£ billion
	1996-97	1997-98	1998-99	1999-00
Plans in 1995 Budget after classification changes	260.1	268.1	275.6	283.2
Control Total set out in this report	260.6	266.5	273.7	280.9
Changes	0.5	-1.7	-1.9	-2.3

Planned growth

CHART HERE

Changes on plans

CHART HERE

Effect of the new spending plans

Table 5.2 Total effect on the Budget of changes in public expenditure(1)

	£ billion
	1997-98	1998-99	1999-00
Change in Control Total	-1.7	-1.9	-2.3
Measures outside the Control Total(2)	-0.3	-0.6	-0.4
Total effects on spending	-1.9	-2.5	-2.7
Revenue effects of spending measures(3)	-0.5	-1.2	-1.8
Total effects of spending measures on PSBR	-2.5	-3.8	-4.5

(1) Measures which reduce the PSBR (lower spending or higher revenue) are shown as negative numbers.

(2) Cyclical social security and effect on accounting adjustments.

(3) Spend to save package (see page 106) and reduction in gross trading surplus of local authorities (see paragraph 5.48).

General government expenditure

CHART HERE

5.15 A detailed analysis of GGE(X) is set out in Table 5.3.

The new expenditure plans

Summary

Table 5.3 The Control Total, GGE(X) and GGE(1)

	£ million
	Outturn	Estimated outturn	New plans/projections			Changes from previous plans/projections
	1995-96	1996-97	1997-98	1998-99	1999-00	1996-97	1997-98	1998-99
Central government expenditure(2)	180 516	185 900	187 200	191 400	195 300	2 000	-700	-400
Local authority expenditure(3)	75 019	75 800	76 100	77 000	77 900	1 200	900	400
Financing requirements of nationalised industries	-354	-500	740	260	70	350	620	570
Reserve			2 500	5 000	7 500	-2 500	-2 500	-2 500
Allowance for shortfall		-600				-600
Control Total	255 181	260 600	266 500	273 700	280 900	500	-1 700	-1 900
Cyclical social security	14 460	14 300	14 100	14 300	14 700	400	0	-400
CG net debt interest	19 963	22 200	24 800	24 400	24 000	-100	800	400
Accounting adjustments	10 082	10 300	9 200	9 800	11 000	600	100	200
GGE(X)	299 686	307 400	314 700	322 200	330 600	1 300	-800	-1 800
Privatisation proceeds	-2 435	-4 500	-2 000	-1 500	-1 000	-500	500	0
Other adjustments(4)	5 751	5 600	6 300	6 500	6 600	-600	-100	300
GGE	303 002	308 500	319 000	327 200	336 300	200	-500	-1 500
GGE(X) as a percent of GDP	42 1/4	41 1/4	40	39	38 1/4	3/4	1/4	1/4

(1) For definitions, rounding and other conventions, see notes in Annex 5.A.

(2) Excluding cyclical social security.

(3) Comprises total central government support for local authorities and local authority self-financed expenditure.

(4) Lottery-financed spending and interest and dividend receipts.

Capital and PFI

Table 5.4 Public sector capital expenditure(1)

	£ billion
	Outturn					Estimated outturn	Projections
	1991-92	1992-93	1993-94	1994-95	1995-96	1996-97	1997-98	1998-99	1999-00
Central government	10.3	10.9	9.8	9.0	8.4	6.9	6.2	6.9	6.8
Local authorities	7.0	7.2	6.7	7.4	7.6	7.3	6.4	5.9	5.8
Public corporations(2)	2.2	3.5	3.5	4.3	4.6	5.5	5.1	4.5	4.4
Notional allocation of the Reserve							0.2	0.5	0.8
Total public sector capital expenditure	19.5	21.5	20.0	20.7	20.6	19.7	18.0	17.8	17.7
Estimated capital expenditure under the Private Finance Initiative			0.1	0.2	0.4	1.1	2.5	3.7	4.3
Total publicly sponsored capital expenditure	19.5	21.5	20.1	20.9	21.0	20.8	20.5	21.5	22.0
Memo: Public sector capital(3)
gross of depreciation	21.6	23.5	21.4	21.7	21.3	19.7	18.0	17.8	17.7
net of depreciation	11.7	14.0	11.7	11.6	10.4	8.5	6.6	6.3	5.9

(1) Figures are shown for the national accounts definition of capital spending (including expenditure out of the proceeds of the National Lottery). See paragraph 5A.10.

(2) Excluding the capital expenditure of industries privatised or planned to be privatised before 31March 2000.

(3) Including industries now privatised while they were in the public sector.

5.18 By themselves, even these figures can give a misleading picture of the level of investment in public services. When the Government buys services from the private sector, investment undertaken by the companies that provide the services is not counted as public sector investment; very often, however, it involves the formation of assets which are deployed to meet public needs. The box article on pages 100 and 101 looks in more detail at the way public services are increasingly being delivered in partnership with the private sector. The boundary of the sector has shifted. The privatisation programme has brought significant qualitative and quantitative benefits from capital investment in industries which used to be predominantly in the public sector.

Private Finance Initiative

This is particularly true of capital spending. In real terms, direct public capital spending has fallen since 1979 (see Chart 1). The reduction is not surprising given the extent of privatisation over the period and increasing investment through the PFI.

The effect of privatisation

If public capital expenditure is adjusted to exclude those industries now privatised, a rather different picture emerges. Chart 1 shows how, leaving the privatised industries aside, public capital spending rose in real terms towards the end of the 1980s and remained consistently higher from 1989-90 to 1996-97 than it was during the 1980s. The reduction after 1996-97 reflects the increasing importance of the PFI (see below).

However, this approach does not show the impact of privatisation, which has freed industries from government control, exposed many of them to competition, and had a substantial impact on infrastructure spending.

It has not proved possible to construct an expenditure series for the capital expenditure in organisations privatised since 1979, to illustrate total investment by these bodies and the public sector during the period since 1979. Nonetheless, the capital investment of those sectors which were predominantly in the public sector in 1979 provides an approximation to the aggregate of direct public capital expenditure and the investment by the privatised industries.

Accordingly, the "1979 public sector" line in Chart 1 shows capital expenditure in the utilities and the transport and communications industries added to that in the public sector and including all health and education capital expenditure. There was a big increase in capital expenditure between 1988 and 1990, in particular. Much of this resulted from freeing the water, telecommunications and electricity industries from public spending controls. Since 1990, the higher level of investment has been maintained in real terms.

The effect of the PFI

The PFI harnesses private sector management and expertise to deliver public services. Contracts under the PFI involve capital investment by the private sector, which would traditionally have been undertaken by the public sector acquiring capital assets itself. Expenditure under the PFI is accelerating, with more than £10 billion of capital investment expected over the next three years. Chart 2 shows the main areas of expected investment under the PFI between 1997-98 and 1999-2000.

Although this investment is carried out by the private sector, it needs to be taken into account in gauging the total level of investment sponsored by the public sector. Chart 1 shows how total publicly sponsored investment is expected to remain throughout the 1990s at a higher level than at any time during the period 1980-81 to 1988-89.

Partnerships and levering in

Over the last two decades there has been a significant growth in partnerships between the public and private sectors. Such partnerships vary in size and have grown up across a wide range of activities to benefit local communities or the country as a whole.

Private expenditure in partnership with the public sector
	£ million
	1997-98	1998-99	1999-00
(a) expenditure by the private sector complementing public provision	500	530	510
(b) direct private sector spending:
(i) for something the public sector would traditionally have done itself	1250	1250	1240
(ii) for something the public sector is unlikely to have done	9970	8760	8940
(c) complementary private investment	5440	4640	4610
Total	17160	15180	15300

The finance provided in this way is now very substantial. From modest beginnings, there was an expansion throughout the 1980s and 1990s. The table shows the forecasts of finance which departments expect to be "levered in" in each of the coming three financial years - around £15billion or more a year. This is money which is not counted in the government accounts but nevertheless contributes to the overall provision of services to the country.

The table lists three broad categories of levered in finance. In several cases an important element in generating the levered in finance will be the use of Challenge Funds or schemes which incorporate challenge funding principles.

(a) Expenditure by the private sector which complements public provision is where finance from a private sector source is used on public sector services. Examples include: employers' contributions to training programmes managed by TECs; a DTI-run initiative to encourage matching funding for scientific research; support for transport infrastructure projects, including the Jubilee line extension; revenue and sponsorship for museums, galleries and other heritage bodies; and a joint funding scheme between ODA and British voluntary organisations working overseas.

(b) Direct private sector spending is private sector investment which has been generated by departmental programmes and spending, directly or as subsidies. (b)(i) includes : spending on housing which results from grants by the Housing Corporation to housing associations; a variety of projects for urban regeneration; research and development; and industrial sponsorship, for example of the Red Arrows. (b)(ii) typically covers urban regeneration where the activity is not, at least in the first instance, economically freestanding (for example, under the umbrella of regional development agencies and boards, English Partnerships and dedicated bodies for specific projects such as the Cardiff Bay Development Corporation, and through the Single Regeneration Budget challenge fund); wider regional selective assistance; transport infrastructure; environmental improvement and protection projects such as flood and coastal defences; support for business such as through Business Links; support for business in emergent countries through the activities of the Commonwealth Development Corporation; industrial research and development activities; agriculture and fisheries research and marketing; support for exporters; activities of the tourist bodies; other support for heritage bodies, such as English Heritage; National Lottery heritage projects; and the Local Authorities' Capital Challenge.

(c) Complementary private investment is where there is no public money involved, but where private sector spending supports government objectives and would probably not have taken place without prior public spending. Examples of this are: private housing developments next to similar projects supported by public grants or refurbishment of high street shops following grant-aided town centre redevelopment, which are encouraged by substantial spending from a number of urban regeneration programmes; industrial and scientific research and support, such as privately-financed medical research into cancer treatments; and activity undertaken by Further and Higher Education institutions, mainly for services provided such as research contracts for industry.

[Prepared November 1996]