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Issue 31, October 1998

Labour's fantasy spending plans

THE GOVERNMENT'S summer public spending announcements, quickly followed by a ministerial reshuffle which saw the resignation of the anti-'welfare' fanatic Frank Field, produced a new round of commentary about the character of Blair's New Labour Party.

Tory shadow chancellor, Francis Maude, claimed that these events marked the end of New Labour's 'Third Way', with the unexpectedly large 2.75% real annual increase in current and capital spending combined (mainly on health and education) marking a return to 'Old Labour' Keynesian policies. Other commentators, ignoring the optimistic economic growth projections underlying the spending plans, spoke of Labour's chancellor, Gordon Brown, as 'a sort of hero', an 'Iron Santa', who might be able to boost public services while avoiding tax rises or an 'excessive' public sector borrowing deficit. So what do these events signify? How much growth will there really be in public spending? Is the Blair government really departing from the neo-liberal parameters that have characterised its first 15 months in office? And what will be the impact of the coming recession on New Labour's plans?

The government's spending plans were always going to be presented with the best possible spin. Even the Labour-controlled parliamentary Treasury select committee criticised the 'double-counting' techniques used, re-calculating, for example, the 19bn headline education spending 'increase' as an actual increase of 8bn between now and 2002. But even these re-calculations don't take into account the two-year public spending freeze carried over by New Labour from the previous Tory government. The March budget Red Book showed that, in real terms, central government spending actually fell by 1% in Labour's first year, from 198.7bn in 1996-97 to 195.8bn in 1997-98.

  What this means for health spending, for example, is that, taken over the length of a five-year parliament, Labour's increases will average 3.5% a year, compared to the 3.1% average annual increase recorded under the Tories. The Office of Health Economics estimates that, to meet the costs of the rising number of elderly patients, new drugs and new medical technology, an annual 3% growth is required just to stand still. No wonder the British Medical Association argued that the new money will be "quickly absorbed in repairing the fabric of the NHS" (literally so for the new 5bn modernisation fund, given a 3bn NHS building repairs maintenance backlog) and would not deliver service improvements without additional 'investment' in doctors and nurses. (Telegraph, 15 July). Yet a general increase in public sector pay, critical to recruiting and retaining staff when private sector pay is rising by over 5%, is certainly not on Brown's agenda.

Clearly, the next three years will see a real, after-inflation, increase in public spending. The government's Budget Report, produced in March, outlined three possible model projections for annual average current public spending growth to the year 2002 - 0.75%, 1.5% or 2.25%. Brown has gone for the most generous and added an extra 0.5% for increased public capital spending. Yet, at best, the plans announced in the Comprehensive Spending Review will prevent a further deterioration in health and education services. On the other hand, local government spending and the social security budget - set to rise by only 1.9%, a "significantly lower" increase than under the Tories according to Brown - are being lined up for further real term cuts.

But didn't the demise of Frank Field signal a retreat by New Labour from its drive to 'reform welfare', or more precisely, to curb social security spending? Mocking the soundbite with which New Labour embarked on its reform programme, The Daily Telegraph greeted Field's resignation with the headline, 'Sinking the unthinkable'. Yet this is to misunderstand the clash between Brown and Field.

  In his resignation speech Field emphasised his oft-repeated argument that the main problem is to combat "the cancerous impact that much of welfare has on people's motivation, their actions and their character", rather than 'the issue' of "the level of expenditure". His approach is that of a Christian moralist - welfare spending should encourage people to 'work and save' and not 'reward idleness'. Practically this means a structure of universal benefits funded on a contributory basis, as opposed to means testing which 'discourages self-provision'. Adopting such "Fieldite proposals" in the area of pension reform, for example, would not, as The Economist conceded (8 August), release immediate savings: "In the short term, at least, welfare bills would have risen quite sharply".

Brown's vision of 'Third Way' politics, on the other hand, is about raising the long-term rate of growth of the British economy - economic rather than moral regeneration. It is a pragmatic neo-liberalism with no principled opposition to 'productive' public spending, 'when the economy can afford it'. Privatising to fund public capital investment, increasing university science research funds (by 1.1bn) to boost high-tech innovation, and investing in 'human capital' through education spending while restraining welfare benefits, are all consistent with the 'Third Way' ideas of these bright new managers of British capitalism. Aside from the reaction of public sector workers to the continued erosion of their living standards - and new lone-parent benefit style rebellions greeting further welfare cuts - the other factor not accounted for in this vision of a New Britain is the coming recession.

Brown's spending plans, which project a balanced budget by 2002, are based on Treasury economic growth forecasts - 2% in 1999-2000 and 2.25% in the following two years - which are consistently higher than most other analysts, for example, the latest OECD report. The prospect of a recession, even on the scale of the 1990-92 downturn, is routinely underplayed by government spokespersons - even as they warn, as Education minister Blunkett did recently, that the economy is 'on a knife edge' (and that therefore wages must be kept in check). It is a key component of Third Way dogma, echoing the Clinton administration's belief in a 'new economic paradigm' of steady growth without economic cycles, that with the right economic management the 'boom and bust' economy can be avoided.

  In fact, a 1990-92 scale recession would blow Brown's plans apart. Then the increased government costs incurred by recession, through rising unemployment benefits etc, saw central government expenditure rise from 168.4bn (in current prices) at the peak of the Lawson boom in 1988/89, to 196.3bn in 1993/94. Total public spending, as a percentage of GDP, rose from 37.8% to 43% over the same period. In terms of government finances, the balance between the increased costs of recession and reduced tax receipts etc, there was a shift equivalent to ten percentage points of GDP, from a budget surplus equal to 3% of GDP to a budget deficit of 7%. The prospect of a similar shift would devastate Brown's plans and open up a new and explosive political situation in Britain.

Some analysts, pointing to the lower levels of company and personal indebtedness compared to 1989/90, (although government debt is higher) question whether a recession on the scale of 1990-92 is likely. But this will be critically affected by developments in the world economy. British export orders are already in a worse position than in 1989/90 and British industry has certainly not used the 'Clarke boom' to enhance its competitive position - 1996 investment spending was less than in 1979.

More serious are the comments of the former Thatcherite professor, John Gray, who argues that to base policy on the prospect of continued economic stability - to "rely on long-standing historical patterns ceasing to apply" - is "a decidedly risky bet" (Guardian, 31 July). A sharp downturn, and "all Gordon Brown's plans for public spending will be thrown into disarray. A good deal is being wagered on the American faith that economic cycles are history".

Clive Heemskerk

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