This week’s public spending and borrowing figures do not make happy reading in the UK. In August 2010, four months after the arrival of a Coalition government which made “immediate cuts”, public spending in the month was 11% higher than a year earlier. It just goes to show how much dynamic growth the last government had injected into UK public sector spending.
The figures for those who believe all the stories of cuts are on the Treasury website, and show current public spending at £49.8 billion for August 2010, compared to £44.9 billion for 2009, an increase of almost £5 billion. £1.7 billion was a general increase in spending, £0.8 billion went on extra benefit payments, and £2.5 billion on additonal debt interest. The high rate of inflation does not help, as some of the debt is inflation linked. The increase in public spending was more than three times the government’s published rate of inflation.
Ministers are, as reported, locked in discussions about how to reduce inherited budgets and programmes. The worry is that debt interest will absorb too much of the £90 billion of spending increases allowed for in the five year budget announced this summer. The more of the increase debt interest takes up, the less of the spending increase is available for departments and worthwhile programmes.
Central to making a success of the spending round is to curb inflation. If the government and Bank get inflation down and keep it down, there is no need to offer inflationary wage awards to employees, or to uprate benefits so much to keep up with the inflation. Removing inflationary pressure would leave much more of the £90 billion increase for improving public services. It would also relieve some of the pressure on the debt interest programme by cutting the amount the government has to pay holders of inflation linked bonds.
Meanwhile The Bank is making more noises about printing money to boost the economy. This in the short term helps as it lowers the interest rate the government has to pay for its borrowings. It is, however, vitally important to the success of the public spending strategy that the Bank takes it inflation duties seriously and gets inflation down to low levels. That is the best way to manage public spending well, avoiding cuts in services that matter within the £90 billion increase allowed.