the 2007 csr : a challenging spending review

IFS

The 2007 CSR : A Challenging Spending Review

Carl EmmersonInstitute for Fiscal Studies

20 February 2007

© Institute for Fiscal Studies, 2007

Main points

• Fiscal tightening projected by Treasury– taxes to rise and spending to fall as a share of

national income

• A Challenging Spending Review– some tight allocations already made– apparent trade-off between schools, hospitals and

child poverty

• Plans could be topped up in future– but would require additional finance, which would

be likely to mean further tax increases


Forecast fiscal tightening

30

35

40

45

50

96

–9

7

97

–9

8

98

–9

9

99

–0

0

00

–0

1

01

–0

2

02

–0

3

03

–0

4

04

–0

5

05

–0

6

06

–0

7

07

–0

8

08

–0

9

09

–1

0

10

–1

1

11

–1

2

Financial year

Pe

rce

nta

ge

of

na

tion

al i

nco

me

Total expenditure

Receipts

Current expenditure

Source: HM Treasury


Total Managed Expenditure

-2

-10

12

3

45

67

8

96–9

7

97–9

8

98–9

9

99–0

0

00–0

1

01–0

2

02–0

3

03–0

4

04–0

5

05–0

6

06–0

7

07–0

8

08–0

9

09–1

0

10–1

1

11–1

2

Financial year

Per

cent

age

real

incr

ease

30

3234

3638

40

4244

4648

50

Per

cent

age

of n

atio

nal

inco

me

Real increase (LH axis)

Level (RH axis)

Source: HM Treasury


Av. annual increase (%) Current Capital Total

2007 CSR +1.9? +2.7 +2.0?

A challenging spending review?



2007 CSR +1.9? +2.7 +2.0?

Labour

April 1999 to March 2008 +3.6 +15.6 +4.0

April 1997 to March 1999 –0.3 +6.7 –0.2




2007 CSR +1.9? +2.7 +2.0?

Labour

April 1999 to March 2008 +3.6 +15.6 +4.0

April 1997 to March 1999 –0.3 +6.7 –0.2

Conservatives

April 1979 to March 1997 +1.7 –4.9 +1.5



How has spending increased?

2.3

4.4

6.2

3.2

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Other

Education

NHS

Total

Average annual real growth (%)Source: HM Treasury

Note: Average annual increase 1996–97 to 2007–08


Known allocations

• Home Office– real freeze

• Cabinet Office, HM Treasury, HM Revenue & Customs, administrative part of DWP– cut of 5% per year in real terms

• Department for Constitutional Affairs– cut of 3½ per year in real terms

• 5 smaller departments– cut of 5% per year in real terms


The difficult trade off?

• Education spending

• Child poverty

• Health spending


School spending

“Our long-term aim should be to ensure for 100 per cent of our children the

educational support now available to just 10 per cent”

Source: HM Treasury


Private spend = £8,000

School spending

Source: DfES

2005–06 spend, £5,019

Remaining shortfall, £2,330

Extra current (Budget 2006) 2007–08, £56

Extra capital (SR 2004)

2007–08, £87

Extra current (SR 2004)

2007–08, £341

Extra current (PBR 2006)

2007–08, £20

Extra capital (Budget 2006)

2010–11, £147


School spending

• 2007 CSR cannot meet this target– To meet in 2010–11 :

£2,330 per pupil * 7.2m pupils ≈ £17bn

• Were pupil numbers to remain constant : 14 years at 2½% p.a.

7 years at 5% p.a.

• Gap not closed if private spending increases– current state spending at 1996–97 private levels


Child poverty in 2010 and 2020

0

5

10

15

20

25

30

359

9–

00

00

–0

1

01

–0

2

02

–0

3

03

–0

4

04

–0

5

05

–0

6

06

–0

7

07

–0

8

08

–0

9

09

–1

0

10

–1

1

11

–1

2

12

–1

3

13

–1

4

14

–1

5

15

–1

6

16

–1

7

17

–1

8

18

–1

9

19

–2

0

20

–2

1

Financial year

OE

CD

po

vert

y ra

te, % Actual Target Current policy baseline

Source: Brewer, Browne and Sutherland (2006)

2010 Cost = £4½bn to £13bn p.a.

depending on targeting


Health spending

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Per

cent

age

of n

atio

nal i

ncom

e

Public

Private

Total

Source: OECD


Health spending

0

2

4

6

8

10

12

96–9

7

97–9

8

98–9

9

99–0

0

00–0

1

01–0

2

02–0

3

03–0

4

04–0

5

05–0

6

06–0

7

07–0

8

08–0

9

09–1

0

10–1

1

11–1

2

Financial year

Per

cent

age

real

incr

ease

4

5

6

7

8

9

10

Per

cent

age

of n

atio

nal

inco

me


Level (RH axis)

Source: HM Treasury

NHS spending under Labour


Wanless review

“levels of public engagement in relation to their health are high: life expectancy increases go

beyond current forecasts, health status improves dramatically and people are confident in the health system and demand high quality care. The health service is responsive with high rates of technology

uptake, particularly in relation to disease prevention. Use of resources is more efficient.”

Source: HM Treasury

Fully engaged scenario:


Health spending

0

2

4

6

8

10

12

96–9

7

97–9

8

98–9

9

99–0

0

00–0

1

01–0

2

02–0

3

03–0

4

04–0

5

05–0

6

06–0

7

07–0

8

08–0

9

09–1

0

10–1

1

11–1

2

Financial year

Per

cent

age

real

incr

ease

4

5

6

7

8

9

10

Per

cent

age

of n

atio

nal

inco

me


Level (RH axis)

Wanless recommendation

Source: HM Treasury

NHS spending under Labour


Health spending

7.27.4

7.77.87.9

8.48.99.1

9.39.6

9.810.1

10.410.5

10.8

0 1 2 3 4 5 6 7 8 9 10 11 12

IrelandFinland

LuxembourgUK

SpainItaly

DenmarkNetherlands

UK (2007–08?)Sweden

AustriaUK (2010–11?)

PortugalBelgiumFranceGreece

Germany

Percentage of national income

Source: OECD; IFS

Unweighted WeightedEU total health spending, 2003


Health spending

7.27.4

7.77.87.9

8.48.99.19.1

9.39.6

9.810.1

10.410.5

10.8

0 1 2 3 4 5 6 7 8 9 10 11 12

IrelandFinland

LuxembourgUK

SpainItaly

DenmarkNetherlands




Germany


Source: OECD; IFS



Health spending

7.27.4

7.77.87.9

8.48.99.19.1

9.39.69.79.8

10.110.410.5

10.8

0 1 2 3 4 5 6 7 8 9 10 11 12

IrelandFinland

LuxembourgUK

SpainItaly

DenmarkNetherlands




Germany


Source: OECD; IFS



What increases might we have?

2.0

1.8

0.0

-5.0

-3.5

11.2

2.0

1.6

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13

NHS and education

Non NHS, non-education

Social security and tax credits

Debt interest

Official Development Assistance

Home office

Of which:

TME after refilling margin


Percentage real increase

9 smaller departments

Source: HM Treasury ; IFS

Department for Constitutional Affairs


What increases might we have?

2.0

1.8

0.0

-5.0

-3.5

11.2

2.0

2.5

0.0

3.3

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13

NHS and education

Non NHS, non-education

Social security and tax credits

Debt interest

Official Development Assistance

Home office

Of which:

TME after refilling margin


Percentage real increase

9 smaller departments

Source: HM Treasury ; IFS

Department for Constitutional Affairs


A trade-off between health and education?

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

Annual real growth in health spending (%)

An

nu

al r

ea

l gro

wth

in e

du

catio

n

spe

nd

ing

(%

)

3.3%



0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10


An

nu

al r

ea

l gro

wth

in e

du

catio

n

spe

nd

ing

(%

)

3.3%

Labour to date



0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10


An

nu

al r

ea

l gro

wth

in e

du

catio

n

spe

nd

ing

(%

)

3.3%

Labour to date

Wanless recommendation =

4.4%



0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10


An

nu

al r

ea

l gro

wth

in e

du

catio

n

spe

nd

ing

(%

)

3.3%

Expected growth in national income = 2½%

Labour to date


4.4%



0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10


An

nu

al r

ea

l gro

wth

in e

du

catio

n

spe

nd

ing

(%

)

3.3%

4.1%

Expected growth in national income = 2½%

Labour to date


4.4%


A ‘firm and fixed’ CSR?

2.73.3

3.9

5.1

2.2

3.33.8

4.5

5.7

2.8

3.5

5.66.2

6.6

0.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

TotalManaged

Expenditure

DepartmentalExpenditure

Limits

NHS Education AnnuallyManaged

Expenditure

Ave

rag

e a

nn

ua

l re

al g

row

th

Original CSR 1998 plansAdjusted for lower inflationLatest outturn

Average increases from April 1999 to March 2002Source: HM Treasury; Department of Health; IFS


Conclusions

• A Challenging Spending Review– some tight allocations already made– apparent trade-off between schools, hospitals and

child poverty

• Plans could be topped up in future– this is what happened under previous (July 1998)

Comprehensive Spending Review– but would require additional finance, which would

be likely to mean further tax increases

IFS


Carl Emmerson

IFS


Carl EmmersonInstitute for Fiscal Studies

20 February 2007

the 2007 csr : a challenging spending review

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