On their marks for the race to the cash box

WHAT A difference an election makes. Five months before 9 April Norman Lamont, the Chancellor, boasted of 'substantial increases in (public) expenditure over the next few years'.

This week, three months after the general election, a rather different prospect is being offered. In the wake of Wednesday's cabinet meeting, the Government announced that public spending would henceforth rise more slowly than the economy as a whole, that the planned total for the year after next is to be cut by pounds 6bn, and that some pledges made during the election campaign are to be deferred.

The new system for the spending round is likely to revolutionise power-play within Whitehall, probably for the better. The new system already exists in many local authorities. Capping rules mean that their total spending is fixed. What councillors must decide is how to trade off competing demands: should they spend more on social services and less on libraries? Should schoolbooks take precedence over road repairs? Perhaps more should be spent on everything, and the agonies of council budgets flow from government meanness; but at least the new system has forced councils to examine their true priorities more directly than in the past.

Now, that system is to be extended to central government. Suddenly, one of the main arguments of ban-the-bomb demonstrators is triumphantly vindicated. Their - our - call for money to be switched from guns to hospitals used to be countered by sophisticated explanations of how things were not that simple. It was not the case, we were told, that a cost overrun on Trident would mean longer queues for hip replacements.

From now on, it will mean precisely that. If the new system of fixed total spending is to stick, then one department's gain will be another's loss. The consequence is that the whole ecology of spending battles will change. Instead of individual departments battling with the Treasury, they will be forced to fight each other.

Equally, as John Patten looks for money to fund his education reforms, or Michael Howard seeks help to ease the introduction of the council tax, not only will they have to persuade the Treasury, but they will also have to beat their rivals to the cash box. I should not be surprised if Mr Patten and Mr Howard start exploring the merits of freezing child benefits, or means-testing state pensions. Their best hope of saving their own budgets will be to screw up someone else's. Whether everyone, or anyone, will be satisfied by the outcome remains to be seen; but the Cabinet has established a system in which rival priorities will be tested, and that is all to the good.

The numbers, however, are another matter. The Treasury's case for stringency goes something like this. In November 1990, three weeks before he became Prime Minister, John Major promised that public spending would have fallen to 39 per cent of gross domestic product by 1993/94 - the lowest percentage for almost 30 years. Since then, public spending commitments have risen and GDP has contracted. This will push next year's proportion up above 44 per cent - the figure inherited from Labour in 1979 and condemned by the Tories as far too high.

Without severe cuts after next year, the figure would remain at about 44 per cent for some years. This is partly because unemployment will continue to increase even after recovery has started; but also because debt interest figures would rise alarmingly.

The problem is that this year's pounds 30bn government borrowing requirement will add pounds 2bn or so to debt interest in subsequent years. Next year's borrowing requirement - say, pounds 35bn - will add up to pounds 3bn each year after 1994. And so on. The prospect looms of an extra burden of pounds 10bn in debt charges by the time of the next election. That would be an extra charge on the Government's spending bill that did not purchase a single extra respirator, textbook or even missile.

That nightmare is born of economic failure. All the latest signs from the real world - house sales, retail turnover, construction orders - point to continuing recession. The consensus among forecasters is moving towards a prediction that the economy will contract by 0.5 per cent this year, and grow by no more than 1 per cent next year. After that, predictions splay out; but let us assume - generously - that the economy grows by 3 per cent a year in 1994, 1995 and 1996.

The result will be that in 1996, the economy will still be only 7 per cent larger than in 1989. Over the course of a seven-year cycle, from peak to peak, gross domestic product will have expanded at an average rate of 1 per cent a year - a worse record than even 1973 to 1979, the period widely cited as the nadir of Britain's post-war performance.

It is that prospect which blights the Government's finances. If ministers are to hold down both taxes and borrowing, then only one policy is possible: public spending, in the medium term, cannot be allowed to expand significantly faster than the economy. But existing commitments mean that during the five years to 1993/94, the planning total will have increased by no less than 25 per cent. Even if we strip out recession-related spending, the increase will still be about 20 per cent.

Had the economy grown by 3 per cent a year, we would have no problem. The public sector borrowing requirement would be small or non-existent - certainly well inside the limit (3 per cent of GDP) agreed last year at Maastricht.

The real point about this Wednesday's cabinet meeting is that it faced the inevitable collision between hope and performance. Given the grim financial prospects, the Chief Secretary to the Treasury, Michael Portillo, had little choice but to squeeze spending if the Government is to reduce both taxes and borrowing by the time of the next election. This week we have seen a new version of the old story: governments fail, public services suffer and ministers try to dodge the blame.