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ECONOMISTS ARGUE EDUCATION AND HEALTH SPENDING COULD BE INCREASED BY£20BN

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A new analysis published today by economists at PricewaterhouseCoopers argues that chancellor Gordon Brown could in...
A new analysis published today by economists at PricewaterhouseCoopers argues that chancellor Gordon Brown could increase total health and education budgets by around£20bn over the next three years. The report also warns, however, that these generous new spending plans may have increased the chance of a further rise in interest rates.

Drawing on detailed new analysis of the government's spending plans under alternative economic scenarios, the report concludes that:

- the new spending plans announced on 11 June are significantly more generous than most commentators have realised and imply faster real growth in the old Control Total than even the 3% growth rate proposed by the TUC

- Gordon Brown is now planning to spend around£23bn more in real terms in 2001/02 than was indicated in Kenneth Clarke's final set of public spending plans

- the generosity of the spending plans could, however, add weight to those arguing for a further rise in interest rates when the monetary policy committee meets on Thursday; such a rise would increase the already significant risk of a hard landing for the UK economy

- if there is a hard landing, another bout of fiscal retrenchment might be required after the next general election, particularly if the UK wished to join EMU in 2002 or 2003

Looking ahead to the comprehensive spending review, the report argues that:

- total public spending growth over the next three years is likely to be restrained by the projected decline in debt interest payments, modest cuts in defence spending and below average real growth in social security spending

- this could allow real health and education spending to be increased by as much as 5-6% per annum (implying a total increase of around£20 billion in cash terms over the next three years) while still keeping total public spending within the overall 'envelope' implied by the Chancellor's new plans

- there is likely to be a significant increase in capital budgets for hospitals and schools, but current spending on health and education could also increase by around 4% per annum in real terms; this would leave room for more generous pay settlements for doctors, nurses and teachers than have been seen in recent years

Commenting on the report Rosemary Radcliffe, head of economics at PricewaterhouseCoopers, said:

'Closer examination reveals that the new spending plans are significantly more generous than the tone of the chancellor's presentation might have suggested or than most commentators have realised. As regards health and education, they leave ample room for the Iron Chancellor to play 'Santa Claus for a day' when the results of the comprehensive spending review are unveiled later this month.'

Table 1: Comparison of spending plans of Kenneth Clarke and Gordon Brown

Total spending (£ bn)1997/981998/991999/002000/012001/02

Clarke plans (Nov 96)324331340348356

Brown plans (June 98)319333.5352370390

Change in cash terms-52.5122234

of which:

- inflation differences2.55.57.59.511.5

- real change in plans-7.5-34.512.522.5

Source: November 1996 Red Book and June 1998 Economic and Fiscal Strategy Report

Table 2: Possible allocation of planned public spending increase: 1998/99 to 2001/02

Increase(£ billion) % real growth p.a.

Health 105.7

Education116.0

Other Departments (within DELs)152.7

Total: Departmental Expenditure Limits364.2

Social Security Benefits121.5

Other Annually Managed Expenditure81.1

Total: Annually Managed Expenditure201.3

Total Managed Expenditure (TME)562.8

- Current expenditure502.3

- Net investment622.3

Source: Illustrative PwC calculations based on projections for total spending in the Economic and Fiscal Strategy Report 1998.

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