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CURRENT AND CAPITAL SPENDING: A VITAL DISTINCTION IN THE FISCAL FRAMEWORK

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Distinguishing between current and capital spending is a key ...
Distinguishing between current and capital spending is a key

requirement for setting fiscal policy in the UK's long-term

interests, says a treasury paper published yesterday.

Chancellor Gordon Brown said:

'The government is determined to build a fiscal framework that

encourages sound and responsible decision-making so that policy is

set in the UK's long-term interest. The golden rule and the

distinction between current and capital spending lie at the heart

of our new approach to fiscal policy.

'We are determined to meet the fiscal rules: we will meet the

golden rule over the economic cycle for the first time for more

than 25 years. That is why we are taking a prudent approach and

aiming both at current surplus and bearing down on debt.'

The paper, Fiscal policy: current and capital spending, argues

that outturns under the previous fiscal framework were not in the

national economic interest. In particular:

- current spending exceeded current receipts by more than 1# per

cent of GDP a year on average over the last economic cycle, not

meeting the golden rule and imposing a burden on future

generations;

- public investment has fallen to low levels by historical and

international standards, even allowing for factors such as the

effects of privatisation, and there are maintenance backlogs.

Previous approaches to fiscal policy lacked transparency and

attached insufficient importance to the distinction between

current and capital spending. However, the government has taken

steps in its first two Budgets to reform the framework:

- the golden rule - borrowing only to invest and not to fund

consumption - recognises the different economic nature of current

and capital spending, and the public sector is being encouraged to

make best use of its existing assets;

- the government has set out clearly its two fiscal rules and is

taking a prudent approach to managing the public finances -

adjusting for the economic cycle and adopting cautious

assumptions.

NOTES

1. The treasury paper discusses the rationale for the government's two fiscal rules in the light of trends in current and capital spending and their interaction with the fiscal policy framework. It argues that previous approaches to fiscal policy lacked transparency and attached insufficient importance to the distinction between current and capital spending.

2. As a result, the paper says, decisions did not accurately

reflect how future generations would have to pay for current

public spending; and the arrangements were widely seen as biased

against capital spending, and tended to encourage cutbacks in

capital rather than current spending.

3. The paper suggests that a more sensible fiscal framework,

while ensuring transparency and accountability, should focus on

long-term planning and outputs rather than short-term bargaining

and inputs. There should be a clear distinction between current

and capital spending, in both the overall control regime and the

departmental spending plans. And policy should be based on

prudence and stability, allowing for inevitable uncertainties.

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