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Economic and Fiscal Strategy Report 1998

Chapter 1

1 Introduction

The first Economic and Fiscal Strategy Report—Stability and Investment for the Long Term—reflects the Government’s commitment to a more open and transparent approach to economic policy. It explains how the Government’s new fiscal approach will help to achieve the central economic objective of high and stable levels of growth and employment. This strategy is based on prudent management of the public finances to build a platform of stability, a phased programme of higher public investment and more efficient use of public assets, and reform and modernisation of our public services––each element underpinned by stable and long-term plans. It combines prudence and stability in public finances with investment and reform in public services.
It is important that the Government’s strict fiscal rules are met. Therefore, in a decisive break from the past, the Government is introducing a tough new regime for the long-term control of public expenditure. The public spending round has been a feature of British economic life since the early sixties. It has established an annual cycle of year-on-year incremental bids by departments; settlements reached by bargaining over inputs rather than analysis of outputs and efficiency; excessive departmentalism; a split between public and private provision; and a bias towards consumption today rather than investment in our future.

The new approach to public spending tackles these deficiencies. It is based on multi-year plans rather than an annual cycle; a clearer distinction between current and capital spending; services justified by proper analysis of their effectiveness rather than bargaining over inputs; and the coordination and integration of services rather than departmentalism and a piecemeal approach to spending. The new system will also be based on a proper understanding of the role and limits of government: a shift from the state only as owner, manager and employer to the state also as facilitator and partner.

A key part of this approach is the two strict fiscal rules, first proposed in the Government’s election Manifesto, that will govern policy over the course of this Parliament:

- the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; and
- the sustainable investment rule: net public debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.

These rules are consistent with the common sense principles set out in the Code for Fiscal Stability and place Britain at the forefront of international best practice. They also recognise the important distinction between current and capital spending.

This Report sets the stage for the conclusions of the Comprehensive Spending Review (CSR) by setting a firm envelope for growth in total public expenditure over the next three years. These plans are fiscally prudent and sustainable. They not only lock in the fiscal tightening achieved over the past year—the largest since 1981—but carry it into 1999-2000 in line with the tightening projected in the March Budget. On prudent assumptions, to allow for inevitable uncertainties, the plans generate a surplus on current budget over the cycle and also reduce the ratio of net public debt to GDP to below 40 per cent over the economic cycle as the economy returns to trend.

Proper investment by the public sector, and better management of the state’s assets, are also vital. In the past, cuts in capital expenditure were made too often as a means of accommodating short-term pressures elsewhere. The consequence has been a significant deterioration in the public sector capital stock and a legacy of inefficient use of productive assets^.[1]

The Government’s approach addresses these shortcomings by making a clear distinction between current and capital spending. Building on a framework of stability, room has been found for an Investing in Britain Fund to provide for the renewal and reform of Britain’s infrastructure and public sector. This will boost growth and innovation and underpin public services. This strategy recognises the roles that public and private investment—separately and together—can play in developing Britain’s infrastructure. It is also supported by the Private Finance Initiative and public-private partnerships which act to promote the efficient use of resources, encourage value for money in public investment and provide a new source of financing for important investment opportunities.

The Government’s plans allow for a near-doubling of public sector net investment by the end of this Parliament (stabilising just below 1½ per cent of GDP). This commitment is prudent, being well within the margins implied by the Government’s strict fiscal rules, and contingent not only on efficient appraisal by departments but also their willingness to dispose of surplus assets. That accords with the purpose of the National Asset Register and the announcements of assets sales made today.

Under the new planning regime, real current spending will rise by an average of 2¼ per cent per annum over the rest of this Parliament, in line with our cautious estimate of the trend rate of growth. This will allow the Government to build a surplus on its current budget, and ensure that the golden rule is met even on a pessimistic assumption of the position of the economy relative to its long-term trend. As well as embodying the Government’s cautious approach, this also increases the scope for investment in Britain’s future.

The important distinction between current and capital spending is reinforced in this Report by a new format for the public finances. This format accords with national accounts conventions and is in line with international practice. Transparency is an indispensable hallmark of good policy. The new format will help the assessment of progress within the fiscal framework.

The Report also sketches out the other factors necessary to achieve a sustained improvement in Britain’s prosperity. A better educated and trained workforce, facing the right incentives to work, and a climate of enterprise involving greater willingness to innovate and compete are all important ingredients of success. The Government’s economic and fiscal strategy, which will be supported by the outcomes of the Comprehensive Spending Review, tackles these issues head-on.

Chapter 2 sets out the Government’s broad economic strategy for achieving the goals of high and stable levels of growth and employment. The particular role played by the framework for fiscal policy is the focus of Chapter 3. Chapter 4 sets out the Government’s expenditure plans, at the aggregate level, for the remainder of this Parliament. Full details of the allocation of spending, and accompanying reforms, will be announced in a White Paper in July.

1 See Fiscal Policy: current and capital spending, HM Treasury June 1998.

The Fiscal Policy document is available below in Adobe Acrobat Portable Document Format (PDF). If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website.

For alternative ways to read PDF documents and further information on website accessibility visit the HM Treasury accessibility page.

Media links

PDF file of Fiscal Policy: Current and Capital Spending (June 1998)

Economic and Fiscal Strategy index page