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

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 today.

Chancellor of the Exchequer 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; and
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 FOR EDITORS

1. The Treasury paper, published today, 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.