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Public Expenditure

Volume 981: debated on Wednesday 26 March 1980

The text on this page has been created from Hansard archive content, it may contain typographical errors.

At the heart of the medium-term strategy is the need to return to a sensible level of public spending and to see taxes and Government borrowing reduced. The spending plans that this Government inherited were too high, and were set to grow considerably faster than production. Most aspects of public spending are worth while if the nation can afford them, but too often we have endorsed plans for rising expenditure that we cannot afford. In the last 20 years the ratio of public expenditure to GDP has risen by a quarter.

It would be all too easy for that ratio to go on rising indefinitely unless we addressed ourselves to fundamentals. That is what we have done in what has been the most far-reaching review of medium-term expenditure plans since they began 20 years ago. This review is crucial to the strategy, crucial to success in reducing the public sector borrowing requirement, lowering interest rates, and bringing down inflation—and crucial if we are to find room for lightening the tax burden and so to provide scope and encouragement for enterprise and initiative.

The results are set out in the public expenditure White Paper published today. Publication of plans for expenditure at the same time as those for taxation has long been widely favoured. The happy coincidence of the two on this occasion is mainly due to the time needed to review inherited expenditure plans fully, but it has enabled me to present together the Government's strategy for expenditure, taxation and the money supply in a way not attempted by my predecessors. One other result of this coincidence is that I have an unusually large number of tax and expenditure proposals to announce in this speech. Details of these are contained in press notices that are being issued today, an index to which can be found in the Vote Office.

The plans in the White Paper show, for the first time ever, a progressive reduction in total expenditure throughout the lifetime of a Parliament. By 1982–83 they will be over 11½ per cent. below those inherited from the previous Government. This reduction works out at over £11 billion at today's prices. Expenditure in 1983–84 is planned to be about 4 per cent. lower, in real terms, than in 1979–80. The effect will be a marked shift in the burdens imposed by the Government and in the balance between the public and private sectors. Above all, we shall have set the volume of public spending on the right course. We shall be creating a climate much more favourable to economic growth.

In the coming year, 1980–81, the reduction from the amount that our predecessors planned to spend is over £5 billion at today's prices prices—roughly equivalent to the revenue raised by an extra 7p on the basic rate of income tax. Since the White Paper published in November, further net reductions of over £900 million have been decided for the coming year. The Government have thought it prudent, however, to set aside £325 million of this for the Contingency Reserve. It should not be necessary to spend all that. These decisions reduced planned spending in 1980–81 by at least £575 million at current prices. Special sales planned for 1980–81 remain at the £500 million mentioned in the November White Paper. That compares with the £1 billion target for 1979–80 announced in my Budget last June. In the event, a total very close to £1 billion has been raised in that way.

In today's circumstances, any Government would have to check the size and growth of public spending. This does not mean, and has not meant, that public expenditure should be cut indiscriminately. Our choices have been guided by the belief that the Government should provide efficiently and realistically those services that they alone are able and best fitted to provide. The role of the State can sensibly be reduced where it has taken over what private initiative can better achieve, and where it has been reducing incentives, increasing bureaucracy and distorting markets.

Only the State can provide adequately for the defence of its citizens against external and internal threats. The Armed Forces and police need to be strengthened and improved. Expenditure on defence, and law and order, therefore, is planned to grow—defence by 3 per cent. a year, in real terms, up to the end of the period, and law and order by 2½ per cent. a year. Spending on health will continue to grow exactly as planned by the last Government, at about 2 per cent. a year over the period. The cost of this increase will he partly offset by increases in charges, including in particular a £1 prescription charge, from next December. [ Interruption.] These charges will yield in total about £30 million in a full year. [ Interruption.]

Order. It is a long tradition of the House that the Chancellor's Statement is heard in silence.

One might have thought that no Labour Government had ever increased charges under the National Health Service. One might also be forgiven for thinking that the Labour Party overlooks the fact that the present wide range of exemptions from charges is and will be maintained, so that, for instance, the elderly, children under 16 and those on low incomes will be unaffected by the increases that I have announced.

But support from the taxpayer for private and nationalised industries is reduced. Provisions for housing is reduced. This reflects both the local authorities' own reduction in building programmes and what the nation can afford in public sector housing investment and subsidies. The reduction in the edution programme reflects a fair and sensible response to falling school rolls and a continuation of the economies to be made in 1980–81. Whilst the number of pupils is expected to fall by about 13 per cent. between 1979–80 and 1983–84, spending on schools is planned to fall by only about 6 per cent. So spending for each pupil will increase, in real terms. The aid programme is also reduced, but remains substantial. It will now be in line with what a country in our present circumstances can afford.

Social security presents particular problems. This programme has been responsible for three-quarters of the total increase in programmes since 1973–74. This Government, no less than their predecessors, are committed to maintaining a social security structure that protects the weakest and most vulnerable in our society. But social security is now one-quarter of total public expenditure and still growing. It cannot be exempt from measures to restrain its growth where these can reasonably be made. Notwithstanding the changes that the Government are making, spending on social security is still expected to increase by nearly 4 per cent. between 1979–80 and 1983–84. I shall return to this area in more detail in a few moments.

There are those who sometimes speak as if all our problems with public expenditure could be solved by reducing bureaucracy while leaving subsidies and services untouched. The process of securing economy cannot be as painless as that. It is easy to forget that the entire cost of the Civil Service represents only one-fifteenth of public expenditure.

Even so, that expenditure represents a substantial cost. At the beginning of this Administration the Civil Service was larger by 40,000 than when we left office. Between 1974 and 1979 local government manpower had increased by over 200,000. Total public service manpower had increased by nearly half a million. It is no criticism of public servants to say that this could not go on. If it were to continue, by 1983 over one-fifth of the labour force would be employed in the public service.

Action has already been taken. The last Government made financial provision for a Civil Service of 748,000 at the end of this month. By 1 April 1981–12 months hence—the Civil Service will be smaller than that by at least 50,000. I cannot yet predict what the size of the Civil Service will be by the end of the present Parliament, but we have made a good start. The Revenue departments, I am glad to say, have been playing their full part in this process of reduction. The numbers employed in the Revenue departments had grown from 87,000 in 1970 to 113,000 when we took office. At that rate, by the year 2000 there would be 175,000 tax collectors, which is more than there are soldiers in the Army.

That process of expansion is now being reversed. In 12 months' time the staff of the Revenue departments will be over 10,000 fewer than when we took office—a reduction of about 8½ per cent. The staff savings from my Budget last year amounted to about 1,400, and the tax measures that I am proposing this year will in themselves enable me to make eventual net savings of 1,700 staff in my departments.

My right hon. Friend the Secretary of State for the Environment and other Ministers have been taking steps that will help local authorities to reduce their manpower. There is now less detailed interference by central Government—fewer circulars and returns—and a large number of statutory controls are being removed. But, as my right hon. Friend the Secretary of State for the Environment pointed out on Monday, progress has been disappointingly slow. The planned reductions in expenditure imply a substantial reduction in local authority staff over the next four years. The local authorities must now give high priority to achieving just that.

The reductions that I have so far described are in the volume of public spending. We must also pay full regard to what it costs. Some of the reasons were eloquently explained to the House by the right hon. Member for Leeds, East (Mr. Healey) on 25 January last year, when he was still Chancellor.

On that occasion the right hon. Gentleman made an assumption that earnings in the 1978–79 pay round might increase by 15 per cent. He said that this assumption, which he described as pessimistic, would increase the cost of central Government and local authority services by £1 billion each in 1979–80 and raise the costs of the nationalised industries by nearly £1 billion.
"Faced with such increases"
—he said—
"… the Government would be compelled to seek reductions in the volume of public expenditure."—[Official Report, 25 January 1979; Vol. 961, c. 756.]
He emphasised that this would inevitably increase unemployment.

We now know that the right hon. Gentleman's assumption about the likely growth in earnings proved all too true. Moreover, his own Administration left behind some large postdated cheques. The Clegg awards are expected to cost something like £2 billion in 1980–81 and the full-year effect of other comparability awards in the Civil Service will add a further £1 billion to that.

Public services and employment cannot escape the effects of inflation. Cash limits are the crucial instrument for ensuring that the costs of public expenditure do not run out of control. For central Government expenditure most of the cash limits for 1980–81 are contained in the parliamentary Estimates, published today. As already announced, they are based on provision for current cost increases of 14 per cent. When the Estimates were being prepared this seemed an adequate allowance for inflation between 1979–80 and 1980–81.

The projection that I am publishing today suggests, in line with those of most outside forecasters, that inflation may be a point or two higher. To increase the provision in the cash limits to accommodate the higher forecast of cost increases would be wrong. That would simply be to condone and encourage inflation. The difference between the provision in the cash limits published today and full provision for the inflation now forecast would be about £700 million. There should be scope to absorb such higher costs through greater efficiency It will not be easy. But the unaceptable alternatives would be to cut services or increase taxes.

In an important respect the reductions announced today are not complete. This country carries a heavy burden of Government payments overseas: first, spending on defence, especially the British Army of the Rhine; second, our net contribution to the European Community; and, third, overseas aid. Relative to our GNP we spend more across the exchanges on defence than any of our NATO partners; we make far the largest net contribution to the EEC budget; and our aid programme—I hope hon. Members below the Gangway will support me on this—is larger than those of the United States, Japan or Germany. One result of the growth of these transfers has been to offset a large part of our substantial private sector earnings on invisible account of the balance of payments.

Of these transfers overseas the fastest growing and least justified has been our large net contribution to the Community budget. Although ranking seventh out of the Nine in GNP per head, we are now making the largest net contribution. The latest estimates by the European Commission again show that our net contribution is much larger than Germany's, whose GNP per head is twice that of the United Kingdom, and that most—if not all—of the other five countries with a higher GNP per head than ourselves are net beneficiaries of the budget. We also transfer substantial resources to our partners outside the budget through the artificially high prices imposed by the Community's agricultural policy.

The White Paper figures make no allowance for the reductions we are negotiating in the United Kingdom's net contribution to the budget of the European Community. Pending a satisfactory conclusion to those negotiations, they include the full estimated costs under present arrangements. If those arrangements are not changed, the likely costs will rise to more than £2 billion at today's prices by 1983–84. A successful outcome to the negotiations is therefore of the highest importance to our medium-term fiscal and monetary stategy and to the success of our attack on inflation. The Government's determination to redress the present unacceptable situation has, I feel certain, the support of the entire House.