The spend, spend, spend enigma

Colin Thain and Maurice Wright have produced a massive study of the planning and control of public expenditure in Britain since the introduction of cash limits in the mid-1970s, describing in detail how the present system has evolved over the past 20 years. The reader is taken round the Treasury, and indeed round Whitehall, in an examination of the changing procedures and machinery by which the Treasury has sought to establish tighter control in conjunction with the spending departments. Reasons for each step in the process of development are fully set out, with frequent references to what has emerged from parliamentary inquiries and white papers as well as from interviews with officials in the Treasury and spending departments. Readers may feel a little overwhelmed by the sheer volume of material and sigh for a little winnowing. Nevertheless this is the most thorough and comprehensive study of public expenditure available.

In the 1960s after the Plowden report, departments were encouraged to look well ahead with tentative plans, in volume terms, covering the next five years. Such arrangements were entirely sensible so long as inflation was low; but when inflation accelerated, planning in "funny money" came under attack and the planning horizon contracted. Cash limits were introduced as a way of obliging departments to take account in their planning of increases in costs and prices which they had hitherto been able to disregard. By 1982, planning was almost entirely in cash terms and on an annual basis, making things difficult for departments like defence that could not avoid entering into long-term commitments. Later changes aimed at better value for money, more professional management of expenditure and decentralisation to agencies under the banner of Next Steps. But the inflation that started things off continued and public expenditure in real terms, as the authors demonstrate, grew as fast as ever.

It is not only the machinery of control that has changed. The aims governing the total have changed too. When the Conservatives took office in 1979 their declared aim was to bring about reductions in public expenditure in real terms. When they were unable to prevent a substantial continued rise, they adopted a new target: to reduce public expenditure as a proportion of gross domestic product. Again this met with no success in their first four years: the proportion rose from 44 per cent to 47.5 per cent. And again the Government was obliged to modify its target and aim instead at a gradual fall in the proportion over time: up to 1989 it had some success as the proportion declined steadily to under 40 per cent, thanks in large measure to the boom of the late 1980s. But by 1993-94 the proportion had risen again to 45 per cent, a little above the proportion in 1979-80, the first year of Mrs Thatcher's government. It is a measure of how far we have come that in the 30 years since 1963-64, public expenditure has grown from 36.5 per cent of GDP to 45 per cent and even reached over 49 per cent in 1975-76 under the Labour government then in power.

The only times when public expenditure in real terms has fallen more than marginally since the 1950s have been in 1976-77 in a major crisis and in 1988-89 in a major boom. It is salutary to recall, with Thain and Wright, that while public expenditure grew at 1.8 per cent per annum under the Labour government in the 1970s, it grew at 1.9 per cent per annum under the Conservative governments that succeeded it, in spite of their determination to make it fall. "The conclusion is irresistible," the authors remark. "Conservative governments were unable to achieve either the heroic objectives set in 1980 or the less ambitious ones which replaced them in the mid-1980s."

A principal reason for the steady increase in public expenditure is that the prices of what public money is spent on rise faster than the average for all prices Q no doubt because services rise faster in price than goods. On one calculation, the annual divergence would appear to be about 2 per cent Q it would be almost enough by itself to require a fixed quantity of public expenditure to grow as fast as GDP.

But the book neglects some important questions. The most obvious is how the growth of public expenditure in Britain has compared with the growth in other countries and what international differences there are in the system of control. The 1970s' picture, for example, changes a good deal. We are told how little remains of the system so much admired in 1970. We are told also of control systems in the United States once favoured and now abandoned, but little or nothing is said of other countries.

The book ends with a glance at a future in which the relationship between the Treasury and the spending departments might cease to be one of "negotiated discretion" and become one of "central prescription". It looks at the possibility of a new department of economic affairs, separate from a ministry of finance confining itself to taxation and expenditure and at the pressures that might develop from a renewed slowdown or from the Maastricht Treaty. In a series of bold assumptions it argues that if the economy grows at 2 per cent per annum and public expenditure slightly faster, the public sector borrowing requirement will reach 7.5 per cent of GDP and public debt 65 per cent, causing a fiscal problem (but not a crisis) and imposing a constraint on the further growth of public expenditure. But of course if Maastricht survives, it would impose much wider constraints on the economic policies of member countries and would have an almost entirely unforseeable impact on the entire Union as well as on individual members.

Sir Alec Cairncross was economic adviser to the Government, 1961-64 and former head of the Government Economic Service, 1964-69.