HM Treasury News Release
96/98 11 June 1998
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CHANCELLOR'S STATEMENT ON THE ECONOMIC AND FISCAL STRATEGY REPORT
Attached is a copy of the Chancellor, Gordon Brown's statement to the House of
Commons today.
NOTES TO EDITORS
1. Accompanying the Economic and Fiscal Strategy Report there are six Treasury
Press Releases 96/98 to 101/98.
STATEMENT BY THE CHANCELLOR OF THE EXCHEQUER ON THE ECONOMIC AND
FISCAL STRATEGY REPORT, IN THE HOUSE OF COMMONS ON JUNE 11TH 1998
The comprehensive spending review has been the most comprehensive and in-depth
examination of government spending and priorities for many years.
Its results will be announced in two stages.
Today I will announce an entirely new regime to apply to public spending control, a fundamental
reform of the rules that govern our public finances.
Later next month I will set out the results of a wholesale revision of our spending priorities and
the purposes of government support in each department.
The central challenge is to combine prudence and stability in public finance with investment and
reform in public services.
There are four key elements to our reforms.
First, the new regime must be consistently prudent and responsible. Strong public services
cannot be sustained on weak public finances. The spending plans we set must ensure
sustainable finances over the whole economic cycle, rigorous financial discipline that, together
with monetary stability, ends once and for all the boom and bust that for 30 years has
undermined stability, hindered long term investment in our public services and prevented the
country achieving its potential. That is why we will enforce two fiscal rules - the golden rule, that
over the cycle current spending is covered by revenues, and the sustainable investment rule,
that there must be a prudent debt to GDP ratio.
Second, in each department we are assessing radically what government does, and how and
where it spends its money. The comprehensive spending review results, when published, will
not only show changes in priorities within and between departments but must redefine the role
of government so that it is enabling and empowering, not centralising and controlling. Where
government should be acting we will do more, where government is unnecessary or restrictive
we should not act at all and the results of the spending review will mean reform and
modernisation.
Third, in respect of publicly owned assets the essential test should be how to best meet the
public interest and we will therefore propose a radical change in government policy towards
investment and the assets government holds.
Finally where governments spend on public services it should link spending explicitly to
modernisation and reform for each government department. Where there is extra money it will
be tied to specific outputs. It will be investment for reform.
So first the new framework for the future.
For thirty years British public spending has been characterised by:
an annual spending round rather than long term planning;
a year-to-year bidding culture, with all the problems of hurried end-of-year corrections,
instead of strategic planning of resources;
incremental bids not tied to outcomes, rather than spending to achieve defined results;
too much attention to current spending and muddling through, too little attention to long
term investment and reform.
too much focus on the public sector acting in isolation from the private sector and not
enough long term partnership with it.
So to break decisively with this old fashioned and short termist culture, first, we will abolish the
annual spending round. We will now set departments firm plans and fixed budgets for three
years at a time.
Second, to ensure our fiscal rules are met and to make possible long term investment in our
infrastructure, there will now be a separate current budget and a separate capital budget for
each department.
Third, in place of incremental budgeting we will lay down new targets for efficiency and
performance for every department.
Fourth, instead of the old sterile conflict between public and private sectors, we will promote
new public private partnerships.
And fifth, for the first time this Government is legislating for a Code for Fiscal Stability which
requires more open and comprehensive reporting of the public accounts. The key assumptions
have been and will continue to be examined by the independent National Audit Office.
The Chief Secretary and I are today publishing detailed figures both for the current balance and
capital spending. And we will set out not only the public sector's net cash requirement, the
PSBR, but also the internationally accepted accruals measure of public sector net borrowing,
which will provide a better guide to the underlying state of the public finances.
Copies of the Economic and Fiscal Strategy Report will be available in the Vote Office.
And all these changes - the end of the annual spending round, a long overdue distinction
between investment and current spending, a new emphasis on outputs, more effective
partnership between the public and private sectors and proper public scrutiny of how we are
meeting our fiscal rules - make clear the importance the Government attaches to reform and
modernisation as the foundation for both sound finance and good public services .
I turn now to the public finance plans that follow from our fiscal rules.
The Government inherited a national debt which doubled in the early 1990s. And in the last
economic cycle, debt as a proportion of GDP rose by 18 percentage points - and is now around
#15,000 for every family in the country. As a result we are paying more in interest payments
than we spend on schools or on housing and law and order put together.
In addition, we inherited a level of annual public borrowing that was unacceptably high: in the
final year of the last Government, a public sector net cash requirement of #23 billion pounds
and public sector net borrowing of #27 billion pounds.
In the first year of the Labour Government, with the tough decisions we took in our first budget,
public sector net borrowing fell last year from #27 billion to #6 billion.
We kept within the spending ceilings that we inherited. In addition to a #400 million increase in
the budget for pensioners, #2 billion more on the NHS and #2.5 billion more on education.
Those who said that we would fail to meet our targets and would fail to show the discipline
necessary have been proved wrong.
Indeed, over the first two years of our Government, through setting tough departmental limits,
spending is within budget.
But Britain must have sustainable public finances, not just for the odd year or two, but
throughout the economic cycle.
And British public spending, which has for decades been denied a long period of consistency
and stability must now be subject not only to a framework for the future but also to clearly
defined limits.
As a result of the plans I am announcing today we will lock in the fiscal tightening I announced in
the March Budget not just for this financial year but for the next financial year as well.
Over the three years from the time we came into Government, that is to 1999-2000, the fiscal
tightening amounts to 2 3/4 per cent of GDP measured by the public sector net cash requirement.
It is 3 1/2 per cent of GDP measured by public sector net borrowing, that is over #25 billion since
1996-97. This is the fiscal tightening from 1996-97 to 1999-2000 that we promised in the
Budget.
To meet our first rule, the golden rule, the Government will plan for a balance on the current
budget over the economic cycle as a whole.
For 35 years, current spending has grown by an average of nearly 3 per cent a year in real
terms.
But within this average, annual changes have ranged from plus 11 per cent to minus 3 per cent.
And from 1989-90 to 1993-94 a surplus on the current budget of over #10 billion was
transformed into a deficit on the current budget of #38 billion. So in the same way that our
economy has suffered from the instability of boom and bust, public spending has suffered the
instability of stop and go. And the uncertainties caused by this short termist approach have
frustrated the long term planning of decent public services.
And let us be clear who suffered first and worst: the vulnerable who depended most on public
services.
So imprudence in public spending is of no help to those who rely on public services being there
when they need them.
In the last economic cycle Britain ran an average deficit on the current budget of 1 1/2 per cent of
GDP, or the equivalent of an annual deficit of #12 billion pounds. By contrast the figures we
publish today will ensure that over the full economic cycle Britain will have a current budget
balance - current expenditure will be covered by revenues over the cycle, something that other
governments have promised but did not achieve.
So that we can deliver sustainable public finances and thus sustainable public services over the
whole cycle. The plans for current spending that I am announcing today deliberately take a
more cautious approach than in the past to meeting the fiscal rules. This is why we need to
plan for a surplus on the current budget over the next three years.
The plans we publish today are for a surplus on the current budget next year of #7 billion, in
2000-1 #10 billion, and in 2001-2 #13 billion.
And within this new framework I can confirm that current spending will grow in line with our
cautious estimate of the trend rate of growth of the economy, that is 2 1/4 per cent in real terms a
year over the next three years. Current spending is now planned to be 39 1/4 per cent of GDP
every year for the rest of the Parliament.
And it is because we are showing prudence in public finance, and because we are prepared to
modernise in choosing our priorities that we will be able to invest in long term improvements in
our key public services, education and health, and also fulfill our commitments to those, like the
elderly, who depend upon public services.
But as everyone knows the public will be better served if we also ensure the best value for
money and the most efficient possible use of resources.
Inefficiency in the public sector is a cost that could be afforded by a government that had a
vested interest in proving the public sector could not work and believed in a philosophy of
private good, public bad. But inefficiency will not be tolerated by a government that will
modernise the public sector so that this country is better equipped for the future.
That is why in our spending review there will be no place for new spending unless there is
reform through clear targets, standards and rigour in the use of money.
I can confirm firstly that as a result of our review each department will set efficiency targets.
Secondly, each department will be set new quality standards. And I can confirm that as part of
best value, we will introduce an inspectorate for housing that will help improve the management
of council housing, set new standards for performance and guarantee high quality of
investment.
And thirdly, before allocations are made from the comprehensive spending review,
departments will have to demonstrate how they propose to root out unjustified subsidies.
So not only will we set fixed budgets for three years but we are building in new disciplines to
ensure that investment is conditional on reform.
Just as new disciplines will apply to current spending, so they will also be applied to capital
investment.
Our second fiscal rule is to ensure a prudent and stable ratio of debt to national income, this is
the sustainable investment rule, which is essential if we are to contain interest payments on the
public debt.
If this Government simply left the debt GDP ratio at the level we inherited from the last
Government we would be paying interest payments of #25 billion more over the parliament, at
a cost to public services.
In the interests of greater stability I propose to bear down on the debt GDP ratio. Indeed the
plans we are publishing this afternoon show the debt ratio falling from 45 per cent when we
came into Government to 40 1/2 per cent next year and in the following years down again to 39 1/2
and 38 1/4 per cent.
The comparable figure in the European Union as a whole is 78 per cent.
Britain will now plan on the basis that our debt GDP ratio will be 40 per cent or lower.
For the first time for decades we are set over the cycle to have both a current budget in
balance and a prudent debt GDP ratio.
As a result of our two fiscal rules public sector net borrowing which was over 3 per cent of GDP
in the last cycle (1985-96 to 1996-97) will average 0.2 per cent for the parliament, 0.2 per cent
next year, 0 per cent for the following two years and 0.1 per cent the year after that.
And we will meet the fiscal criteria laid down in the Maastricht Treaty.
It is only because we have set this tough framework, based on strict control of current
spending, a prudent debt GDP ratio and a fiscal tightening that it is possible to take the action
necessary to reverse the chronic under-investment in our country's health, education and
transport and housing infrastructure, and to re-equip Britain as a modern nation.
Total investment, public and private, in Britain, has in recent years fallen, as a share of national
income, and is far behind our competitors, and far behind the rates we achieved in the thirty
years after the war.
But if Britain is to renew its infrastructure, we must be prepared to break with old dogmas. We
will not succeed simply by throwing money at problems or by privatising the responsibility for
them and we must therefore be prepared to look at new ways of managing our assets and if
necessary be prepared to redeploy them so that they serve the future not reflect the past.
The British Government has property, land and other assets worth hundreds of billions of
pounds.
But, as we discovered in the first register of national assets, Britain has an accumulation of
unused and underused properties and holdings.
We can no longer afford a surplus of holdings when have a deficit in investment and there is
no benefit to us in hoarding assets that do nothing to equip us for the future when we need to
build a modern twenty first century infrastructure. There is no public interest served by
continuing to hold surplus land and buildings that are not needed.
The fiscal projections set a new target for central Government to realise for investment around
#1 billion a year for each of the coming three years from the sale of surplus holdings we no
longer need.
And in the next financial year we will go ahead with the sale of all remaining debt held in British
energy.
So we will realise the value of what we do not need to invest in what we do need.
The Deputy Prime Minister and I will propose a new long term framework for investment by
local authorities:
to release resources for new investment; and
to co-ordinate the use of existing assets.
And local authorities are now expected to realise at least #2 3/4 billion a year from property sales.
Again a sale of what we do not need to pay for investment in what we do need.
And to maximise investment in the renewal of our infrastructure, public and private sectors
must work together in a more modern and effective partnership.
In the past the private finance initiative was a means of substituting private investment for
public investment and thus an excuse for abdicating responsibility for public investment. So
there was no net gain to investment in our country.
But as we have shown with our new deal for schools, public-private partnerships work best
when public investment succeeds in levering in additional finance from the private sector.
And as the Deputy Prime Minister has shown in the planned multi-billion investment in the
Channel Tunnel Rail Link and London Underground, private investment can be mobilised to
serve the public interest.
So this Government will apply a public interest test. What is the best means, whether through
private or public investment, of securing the highest levels of investment in Britain's future and
so ensuring the best public services. Not demanding private ownership as a matter of dogma
when it does not serve the public interest, nor maintaining state ownership when private and
public partnership is the best way of advancing the public interest.
It is obvious to the Deputy Prime Minister and me that the levels of investment and efficiency
that we need in our National Air Traffic Services can be best achieved through a partnership
between the public and private sector which will give the National Air Traffic Services the
flexibility to plan and finance forward investment more effectively.
Safety is paramount. The Government's proposals will ensure that air safety regulation is
conducted independently from the National Air Traffic Services and is open and transparent.
The regulator's remit will be to enforce the toughest safety standards in the world.
My RHF the Minister for Transport is making a separate announcement today on the future of
air traffic control services. Our preference is that 49 per cent of the shares, and a golden
share, are held by the Government, and 51 per cent by private investors including employees.
We will consult on the details of the implementation of the proposals.
This realisation of assets will enable us to invest more in our transport infrastructure as will our
proposals for greater commercial freedom for financially sound regional airports such as
Manchester, Newcastle, Leeds-Bradford and Norwich.
The same partnership approach is appropriate for the Commonwealth Development
Corporation which needs new finance for higher investment in developing countries, and my
RHF the Secretary of State for International Development will bring forward proposals to sell a
majority shareholding.
We will also consider how to extend the existing public-private partnership in the Tote into a
broader partnership with the private sector.
And I can also announce that we are agreed in principle that a new public private partnership is
the best way for the Royal Mint to take advantage of new commercial opportunities.
These are four examples of new partnerships now being evolved that show we can make the
long-term investment we need while protecting the public interest .
But public investment in reform and modernisation is also a means by which the Government
can help renew our country's infrastructure.
Under the last Government public investment fell below 1 per cent of national income and we
now invest less than all our major European partners.
This Government recognises that we must invest properly in our economic and social
infrastructure. In:
our schools and our hospitals;
our transport infrastructure;
our science and technology base;
in building better housing and safer and stronger communities.
To meet these challenges of the future we are therefore setting up a new programme, Investing
in Britain's future.
So over this parliament we will double the level of net public investment as a share of GDP. By
raising it from 3/4 per cent up to 1 1/2 per cent. And through realising unused and underused
assets we will plan to invest #29 billion a year by the end of the Parliament.
In place of two decades of run-down in investment, Britain is investing in its own future. And
our long-term aim will be to maintain the share of investment in national income, at this
sustainable and prudent level.
For years we have been told that prudence in public finances could only be achieved at the
cost of running down public investment and neglecting public services, years that ended with
neither good public services nor prudence.
The framework I am announcing today means that with sensible and tough decisions about
priorities in every department in our comprehensive spending review, which will report next
month, this country will now be able to ensure that the necessary resources are available for
health, education and essential public services.
Because of our toughness to modernise and our discipline in reform, our prudence today
provides the solid foundation to invest in better schools, hospitals and public services today
and tomorrow.
And in place of short termism and the neglect of public services, we have a new long term
direction for the renewal of our public services and our country.
Prudence and investment in reform are the way forward to create a Britain that is modern,
strong and fair. And I commend this Statement to the House.
# = pounds sterling