The true spending and borrowing strategy of the government is reasonably kind to the public sector

There are just three central figures in the Treasury Red Book which sum up this government’s 5 year plan. They are figures that very few commentators and journalists seem to want to understand.

If you compare 2014-15, this government’s last planned year, with the last year of Labour, you should expect;

Public sector current spending up by £92 billion or 15% – a small real increase if inflation is 2% or less – that’s £11,500 per head instead of £10,000 per head, or £46,000 for a family of four

£176 billion more collected in taxes in Year 5 – that’s around £12,0000 extra for an average family of four

£451 billion more borrowed over the lifetime of this Parliament – that an increase in the public debt larger than the total debt inherited by Labour in 1997.

It’s difficult to say this is unduly mean on the public sector, given the huge deficit and rising interest rate bill.

An extra £451 billion of debt means extra interest payments of around  £13.5 billion a year if interest rates stay as low as they are currently.

The main winners in gaining extra spending are the EU budget, Overseas Aid, Debt Interest, Pensions, Health, Schools and Equitable Life holders.

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34 Comments

  1. Mick Anderson
    Posted October 18, 2010 at 7:08 am | Permalink

    £46k for a family of four is the equivalent of 100% taxation, assuming that two parents work and and each earn the average wage of £23k. I know that business taxation accounts for some Government income, but even if that's half of it, the State is taking far too large a proportion of personal income.

    It doesn't sound as though the Coalition is trying nearly hard enough to reduce Labours deficit. They need to stop passing out the money that Labour promised as part of the scorched earth policy. I'll only take them seriously if income covers spending by the end of this Parliament, preferably with repayments on the debt being made.

    • Robert
      Posted October 18, 2010 at 9:28 am | Permalink

      Your calculation shows the importance of businesses and high-earners to the Exchequer, as a family of four in reality does not pay 100% tax (please don't get me wrong, I absolutely agree with you that the State taking 50% of GDP is extremely dangerous). The coalition's error is that it is dressing up an era of public spending increases in the clothes of austerity, getting the worst of both worlds – state spending does not fall materially as a percentage of GDP and a great deal of unfounded resentment about spending cuts is generated. I wish they would take a more upbeat approach: "We are doing everything in our power to allow an enterprise economy to evolve in which endeavour and success is applauded. We will cut the top rate of personal taxation, reduce business taxes, scrap red tape and make the UK the most attractive location in the world for businesses to locate." If they did that, they could have their cake and eat it.

  2. Mick Anderson
    Posted October 18, 2010 at 7:08 am | Permalink

    I don't really care if some people on benefits "lose out". If they didn't deserve the money in the first place, it's not really a loss – they simply no longer have an unfair extra. Never mind a £500/week cap – why should they be given more than the average wage after tax?

    The EU certainly doesn't deserve any increase in payment. Overseas Aid and the others listed should be grateful if their budget isn't cut, except for Equitable Life. The only honourable thing to do here is make the pensions industry fund the full promise made to the savers, which has no cost to the tax payer!

  3. Lottery Balls
    Posted October 18, 2010 at 7:25 am | Permalink

    Good summary £10,000 per head is still about double what they should be spending and still they intend to short change equitable life holders.

    To raise more tax now they should introduce a tax cap for certain wealthy investors who come to or invest in the UK. If they pay say £150,000 PA then each one that comes helps the position greatly. They could also allow people to prepay their inheritance tax in some way paying a lump sum or a monthly fee like a life policy. This would raise money now rather than later and cut out the life company middle man. And allow people to arrange their affairs rather better.

    PS Lots of old comments that were on your systems now seem to have vanished on climate change for example.

  4. London Calling
    Posted October 18, 2010 at 7:47 am | Permalink

    You missed one group John – losers. The losers are anyone with any savings foolish enough to try and provide for their own retirement. Inflation 3-4%, HSBC standard variable interest rate 0.2%, taxable. How much longer do we have to endure the riduculous MPC /BoE fiction on interest rates?

    • Richard
      Posted October 18, 2010 at 1:38 pm | Permalink

      If you're putting money in savings accounts, you only have yourself to blame. The rest of us put it in savings bond ISAs (4%) and corporate bonds and equity ISAs (15% growth).

      It really isn't that hard; learn how to manage your own money, or invest in mutual funds. Otherwise, you deserve the lousy interest you're getting.

  5. Robert
    Posted October 18, 2010 at 7:56 am | Permalink

    What you really want to say is that there will be more tax and spend. Only this time it is Tory tax and spend.

    • Lottery Balls
      Posted October 18, 2010 at 8:14 am | Permalink

      Mainly tax and waste!

  6. niconoclast
    Posted October 18, 2010 at 8:00 am | Permalink

    This is reading like a Guardian blog.Nor Conservative should be crowing about how much taxpayer's money is being spent on the EU,Schools,Overseas Aid,Pensions,Health and Equitable Life.Have you gone native Mr Red?

  7. Nick
    Posted October 18, 2010 at 9:02 am | Permalink

    http://www.ukpublicspending.co.uk/

    UK public spending this year is 661 billion. Population 60 million. Spending per head is over 11,000

    Where have you got your 10,000 figure from?

    With the debts escalating, why are we adding to them?

    With growth forecasted for 2%, what is the sense of borrowing at 5%? Future cuts have to be even harsher.

    Reply: I used the last Labour year, total current spending. This year’s total including capital is of course higher.

    • John Redwood
      Posted October 18, 2010 at 10:15 am | Permalink

      My figure is total current spending in the last Labour year. This year current spending is higher, and you can also add in capital.

  8. Brian Tomkinson
    Posted October 18, 2010 at 9:02 am | Permalink

    Just why we have retained the country's credit rating is a mystery – perhaps those who decide these things have shown as scant interest in the budget figures as the media. I ask again what happened to the idea of the smaller state? Was this just spin to placate the markets and win the election?

    • Stuart Fairney
      Posted October 19, 2010 at 4:34 am | Permalink

      We haven't in a de facto sense, just look at the cost of insuring a UK default against countries which aren't bust. You'll see it costs about the same for UK debt as some AA countries, not AAA nations.

  9. oldtimer
    Posted October 18, 2010 at 10:03 am | Permalink

    Clearly it is a triumph of spin (about cuts) over reality (a colossal increase in spending and debt).

    You seem to be alone in pointing this out.

    PS It would be helpful to have your insights into Gordon`s knots, to which the Coalition appears reluctant to apply the knife. These are a special category offering cuts potential that deserve extra close scrutiny. The carrier contracts are an obvious example of an extremely tricky Gordon knot. Failure to offer a referendum on the Lisbon Treaty is another. The Climate Change Act and all its nefarious works and machinations is a third. The tangled web of benefits and tax credits is a fourth. This last area is one where Mr Osborne has a little more freedom for action. Let us hope he uses it.

  10. Glyn H
    Posted October 18, 2010 at 11:30 am | Permalink

    Robert and Oldtimer make excellent points which the coalition should be making at every opportunity. I recall Angus Maude being appointed by the Thatcher administration to get the ‘message’ accross properly. The younger Mr Maude seems no more successful that his papa.

  11. Alfred T Mahan
    Posted October 18, 2010 at 11:37 am | Permalink

    Did you really mean to write

    "Public sector current spending up by £92 billion or 15% – a small real increase if inflation is 2% or less "?

    It looks a pretty massive increase to me.

  12. A.Sedgwick
    Posted October 18, 2010 at 12:40 pm | Permalink

    The true spending and borrowing strategy of the government is UNreasonably kind to the public sector.

  13. English Pensioner
    Posted October 18, 2010 at 1:17 pm | Permalink

    Where are the cuts?
    Why does the EU get an increase in their expenditure when we are having to cut back in Britain. I'm sure Mrs Thatcher would never agreed, but this government doesn't seem to have the bottle.
    And as for overseas aid, some I can understand, but why India and China. And as most seems to end up as either Mercedes Cars or in Swiss Banks via corrupt officials, it is time we ruled that any aid must be in the form of goods manufactured in this country. This would help us at the same time as reducing corruption.

  14. akvavitix
    Posted October 18, 2010 at 2:26 pm | Permalink

    We need a more radical approach to cuts than this gutless Coalition government are prepared to give. Taxation is already starving our country of commercial oxygen and with the impending jump in VAT among other hikes, it is only going to get worse. Slash the public sector, I have not seen any real signs of cuts, just gesture politics

    • Stuart Fairney
      Posted October 19, 2010 at 4:39 am | Permalink

      Yep, can't argue with that. We have the choice of a change of personnel running fundamentally the same policies with minor arguments around the edges. Where as the areas of total agreement and no debate are:

      ~ nationalised health system
      ~ nationalised education system
      ~ nationalised state TV
      ~ heavily subsidised agriculture
      ~ ignore balance of payments disaster
      ~ foreign military intervention
      ~ pro EU integration
      ~ deficit financed government
      ~ fiat currency
      ~ persistently high and very complex taxes on everything which deceive and impoverish
      ~ unfunded (and quite unpayable) future pension committments
      ~ disarmed populace with no effective right of self-defence
      ~ failed but continuing welfare system
      ~ no answers to lawlessness
      ~ appeasement of criminal cultural radicalism and wide open borders
      ~ whole-hearted adoption of the eco-nonsense
      ~ closed and exclusive political system
      ~ certain views more or less forbidden so no real free speech
      ~ all parties very statist (despite what they claim)

      Really, what is substantially left to talk about?

  15. John
    Posted October 18, 2010 at 2:53 pm | Permalink

    There is a strategy?

  16. THE ESSEX GIRLS
    Posted October 18, 2010 at 3:35 pm | Permalink

    Your summary reinforces the views that we posted regarding the BBC presentation of 'the cuts'. That is that the figures belie the impression ramped up by the government as well as the media that a bloodbath is to follow Wednesday's review.
    Mick Anderson's analysis above that:
    "It doesn't sound as though the Coalition is trying nearly hard enough to reduce Labours deficit" seems closer to the truth and we continue to wonder why the Coalition has spun the review in this way?

    • Stuart Fairney
      Posted October 19, 2010 at 4:41 am | Permalink

      To pretend there is disagreement and real choice when neither in fact exist.

  17. Robbo
    Posted October 18, 2010 at 3:57 pm | Permalink

    Why no real cuts ? Over the Blair / Brown years a vast toxic bureaucracy was built to interfere in every corner of our lives. This government should be taking us back to John Major levels of expenditure. That would light up growth in the private sector. Grrrrrrrrr

  18. electro-kevin
    Posted October 18, 2010 at 4:05 pm | Permalink

    These rises in spending beg a very important question, Mr Redwood.

    If these rises go ahead then what of the bodies that own our debt; the various banks, treasuries, financial ministries, pension funds and hedge funds ? How do we convince them that they shouldn't behave in a way that threatens our AAA rating ?

    Perhaps Mr Cameron is playing a double-blinder. Broadcasting via the media messages of austerity to satisfy the above whilst attempting to keep at bay unionised labour by giving them more.

    All things to all men. Haven't we been here before ?

  19. Alan Jutson
    Posted October 18, 2010 at 5:23 pm | Permalink

    As posted before.

    Why take the blame for Cuts, when there is not very much, its giving ammunition to Labour, the Media and the Voters.

    With regard to £11,500 per head, does this include only those paying tax ?.

    Reason for asking.
    All those on Benefits get the money TAX FREE. Only when they spend it do they pay VAT on some items as its a maximum of 20% for them in the New Year.

    This somehow does not seem like "we are all in it together".

    I will hold my powder dry until the "Cuts" are in Official Figures.

  20. MarkJ
    Posted October 18, 2010 at 6:07 pm | Permalink

    What is being done to address the issue raised by Sir Philip Green regarding purchasing and procurement inn the public sector? Examples being expensive mobile phone contracts and laptops that were double the RRP. Big businesses know when dealing with the public sector it is a licence to print money and rip off by charging over the odds without proper checking or accountablity in the public sector. If rumours are true then £25 billion can be saved a year – quite a significant saving.

    I detest higher taxes on already stretched household budgets, when the public sector needs reforms first to stop wasting so much money. Only then should taxes be raised if a shortfall still exists.

  21. Alan Wheatley
    Posted October 18, 2010 at 6:33 pm | Permalink

    Regarding the EU payment increase, clearly Mr. Hague did not heed your call to "stand up for Britain".

    • Winston's Black Dog
      Posted October 20, 2010 at 3:25 pm | Permalink

      When does a Conservative ever "stand up for Britain?"

      Cameron and his Lib Dem friends are doing their utmost to irretrievably integrate us with the EU by removing our ability to defend ourselves and what do our elected representatives do?

      Roll over to have their tummies tickled by the whips!

      Thank God I voted UKIP rather than for Cameron's traitorous shower! Cameron is Heath reincarnated.

  22. Alex_Sabine
    Posted October 19, 2010 at 1:55 am | Permalink

    To get a full perspective on the fiscal plans, we have to look at *all* the key figures and ideally also put them in a historical context.

    First of all, what are we trying to establish or measure? If it is the scale of the fiscal problem and how the coalition plans to address it, then we need the totals for overall public expenditure and tax revenue. The gap between these gives us a borrowing total for each year, which in turn determines changes in the stock of debt. We also want to look at how much of the deficit is ‘structural’ vs ‘cyclical’. These are obviously the crucial headline figures as far as the markets are concerned.

    But the government also has to think about another (rather important) audience, the general public, and what its experience of the new fiscal environment will be. Here what matters is not broad aggregates but the 'granular' figures that will become clearer on Wednesday: the amount allocated for all departmental spending; how this is broken down between departments; the balance between current and capital spending; spending on welfare and pensions; and the extent to which debt interest reduces the available resources.

  23. Alex_Sabine
    Posted October 19, 2010 at 1:57 am | Permalink

    John has quite legitimately focused on the broad fiscal aggregates. These were set out in the budget. The Spending Review will fill in more detail about the second category (departmental spending totals etc), and it is these that are likely to be more relevant as far as what the public experience of the next few years will be.

    Taking the fiscal aggregates first, the Red Book does indeed show a rise in nominal spending over the CSR period (2011-12 to 2014-15). But it's the smallest percentage rise in nominal spending over any four-year period since World War II. Total Managed Expenditure is forecast to be £697bn this year and £738bn in 2014-15 – a rise of 1.5% per year. If inflation exceeds 1.5% – as it is expected to – then this does indeed represent a (small) real-terms cut. Since the war there has never been a period of real-terms cuts lasting longer than two years. So it is a tough policy by historical standards.

    John, you said in a reply to a comment I made the other day that you look at total spending, “as that determines how much we need to borrow”. But in that case the relevant figure is Total Managed Expenditure, not current spending alone; it doesn't make sense to exclude capital investment, since this also determines how much we need to borrow.

  24. Alex_Sabine
    Posted October 19, 2010 at 1:58 am | Permalink

    The government has pencilled in big cuts to capital spending in cash as well as real terms – from £39bn this year to £21bn in 2014-15. It follows that the (cash terms) rise in total spending is considerably less than the rise in current spending.

    Then there’s the question of which year you pick as the baseline for comparison. John takes 2009-10, which is fair if what we’re looking at is the coalition’s actions over the whole Parliament. But since we know that 2010-11 is a holding year with only minor changes to Labour’s plans, and the CSR covers the four-year period from 2011-12, it seems more logical to take 2010-11 as the baseline before the CSR package takes effect in 2011-12.

    On the projections set out in the Red Book, current spending over the period 2011-12 to 2014-15 rises by about 2.2% per year (slightly less than forecast inflation, which averages 2.5% on the 'GDP deflator' measure used in public finance forecasts). There are some indications that George Osborne may since have altered the balance between capital and current spending so as to reduce the capital cuts – but in any case it seems likely that current spending will be broadly frozen in real terms, while capital spending will be cut sharply.

  25. Alex_Sabine
    Posted October 19, 2010 at 1:59 am | Permalink

    The real focus of the headlines about "cuts" has been the tight squeeze in departmental spending (DELs) that arises due to spiralling debt interest costs and rising social security spending.

    The DEL total is projected to fall in cash as well as real terms, from £380bn this year to £362bn in 2014-15 – a real-terms cut of 14% by the final year. When you factor in the decision to ring-fence large areas like NHS spending, you see how the figure of 25% average departmental cuts arises.

    If additional savings from the welfare budget have been found, then the cuts in "non-protected" departmental spending will probably closer to 20%. I’m sure the government will emphasise that this is a cumulative figure for the cuts required by the end of the CSR period – departments will not lose 20% of their budgets overnight, more like 4-6% per year.

    Of course the political choices made in terms of priorities mean that some areas of spending will actually grow in real terms (NHS, schools, overseas aid, basic state pension) while some departments will have their budgets cut by 30% or more by 2014-15. It's a much more differentiated approach to deficit reduction than was taken in Sweden in the 1990s, when most areas of spending were cut by a uniform amount.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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