Funny money Budget could be poisoned chalice

Clarke's spending plans will starve key services of desperately needed funds, writes Alissa Goodman

When the Chancellor announced his plans for public spending he appeared to be presenting an ideal package. He promised to provide more services, but spend less money. The voters were told that they would get more of what they care about - namely health and education. At the same time the books showed that about pounds 7bn has been wiped off the public spending plans over the next three years. As a result, overall spending is barely going to rise at all between now and the next century.

How does this apparent generosity combined with fiscal frugality add up? The answer to this is three-fold.

Firstly, in some cases the new money isn't really new at all. This is true for a large chunk of the promised extra cash to health. It is also true for the extra spending on schools.

The Budget promise for health was that spending on patient care would rise by pounds 1.6bn next year. But little of this will be new money.

Only an additional pounds 470m new money has been allocated to the NHS in this Budget. The rest comes from within the existing health budget. Much of it is from presumed "efficiency gains".

Health investment programmes are also badly hit - NHS capital spending will fall by 10 per cent in real terms next year to fund the "Budget boost" to patient services. Expected PFI projects will not come close to filling this gap.

The overall picture for funding to health is not so rosy either. As the plans stand, there will be less than 1 per cent real growth in spending next year, a real cut the following year, and a minuscule 0.1 per cent increase planned for the year after that.

The Government is sailing very close to the wind on keeping its manifesto commitment to increase real spending on health year on year.

Just like the "extra" money to health, much of the promised increased spending on education will not be new money either.

This time it will have to come out of existing local authority funds. An extra pounds 830m was promised in the Budget to be spent on schools.

The responsibility for most of this additional spending lies with local authorities, who control the budgets of most state schools. But what the Budget books show is that the overall amount of money going to local authorities from central government is actually going to fall next year.

While local authorities will see the education component of their grants from central government raised, the rest of their grants are being very heavily squeezed.

This means that if they are to spend more on schools next year, this will have to be at the expense of their other spending commitments, or council taxes will have to rise. Whichever way, there is no extra money from the centre.

So health and education are not recipients of generous new funds next year. In fact, the biggest new money will not be spent on services at all, but to pay for the BSE crisis. This has proved to be a serious drain on the public finances, costing almost pounds 3bn over the next three years.

Large cutbacks in some areas is the second way in which extra spending demands have been reconciled with such tight overall spending plans. Investment programmes are being cut back, not just in health, but across the board.

The much trumpeted Private Finance Initiative will bring forth some additional investment in the public infrastructure. But it will fall far short of even maintaining the level of "public" investment in real terms, let alone allowing it to grow as the economy grows. PFI projects do not come for free either.

They will save on spending today, but incur spending commitments into the future as the Government has to pay for the use of the privately owned roads and hospitals.

Some departments are also being hit hard. Some of the largest losers from the Budget are Overseas Development, and National Heritage.

The Government promised last year that any lottery-financed spending would be extra spending.

But it appears that the lottery is allowing National Heritage spending cuts through the back door.

The final way in which money has been shed from the spending plans without ostensible service cuts, is what boils down to a new kind of creative accounting.

Two large chunks of the Government's assets are being sold off, and the proceeds of these are being counted as cuts in spending.

Privatising student loans, and selling off of the MoD's married quarters will take pounds 1.7bn off the spending totals next year. In effect, the Government is giving up all of its future loan repayments (in the case of student loans), so that it can spend the extra money now. What this all amounts to is that Ken Clarke has kept his spending plans very tight indeed this year.

This is a far cry from the last pre-election spending plans announced by Norman Lamont in his Autumn Statement of 1991. Spending shot up in the run-up to the last election.

No doubt the Chancellor will be congratulated in some quarters for keeping his spending plans so tightly controlled, moving closer towards what John Major has described as a "moral case" for a smaller state. But the bald fact remains that these plans, if kept to, will gradually starve key services of the funds required to keep up with the public's expectations.

In any case there is good reason to doubt that the plans are credible. The very tiny spending growth envisaged year on year is the most stringent planned in decades.

The odds are that whatever the Government's intention, public spending will grow faster than this.

It may well turn out that these plans will be a poisoned chalice for the next government which has to try to keep to them.

Alissa Goodman is a researcher at the Institute for Fiscal Studies