Chapter 2: Delivering stability and strong public services
Economic stability is an essential pre-condition for high and stable levels of growth and employment and strong and sustainable public services. The Government is delivering a strong and stable economy. The transparent monetary policy framework is locking in historically low inflation, while the fiscal policy framework - underpinned by two tough fiscal rules - is delivering sound public finances. The outcome of the 2000 Spending Review maintains the Government's commitment to stability and prudence:
With spending in line with the Budget 2000 envelope, and taking account of recent developments on government receipts, including proceeds from the spectrum auction, the fiscal stance over the next three years is on track to be at least as tight as set out in Budget 2000. At the same time as providing additional resources for priority public services, the Government is focusing on ensuring that the money is spent effectively and that it delivers the outcomes which the public want to see. The Spending Review has allocated resources in return for clear agreements to achieve quantified improvements in services, through new Public Service Agreements. |
Delivering Macroeconomic stability
2.1 The Government has put in place clear frameworks for both monetary and fiscal policy to secure long-term economic stability, reducing the volatility in output and inflation from which Britain has suffered in the past. The monetary policy framework focuses on price stability and has allowed interest rates to be lower and more stable than in the past, while the Government's fiscal framework - enshrined in the Code for Fiscal Stability - is designed to deliver sound public finances and to support monetary policy over the economic cycle.
2.2 The Government has set two firm rules for fiscal policy:
- 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: public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.
2.3 To help ensure that these fiscal rules are met, the Government has adopted prudent assumptions in its projections of the public finances. These assumptions, which include a cautious view of the economy's trend rate of growth, independent forecasts of unemployment and market expectations of interest rates, have been audited and confirmed as reasonable and prudent by the National Audit Office (NAO). Furthermore, because there is always uncertainty about where the economy is in relation to trend output, the fiscal rules are also considered against a more cautious case in which trend output is assumed to be 1 per cent lower than in the main projection.
2.4 The March 2000 Economic and Fiscal Strategy Report (EFSR)1 explained how the Government's commitment to stability and prudence would be maintained over the coming years. Budget 2000 locked in the fiscal tightening over the next two years to an even greater extent than projected in Budget 99. As illustrated in Charts 2.1 and 2.2, the Budget 2000 projections show the Government remaining on track to meet its fiscal rules over the economic cycle, including in the more cautious case.
Fiscal developments since the Budget
2.5 The budgetary outturn for 1999-2000, published since March, has shown a larger surplus than expected at the time of the Budget, allowing the Government to make a greater than expected debt repayment. As shown in Table 2.1, the surplus on current budget in 1999-2000 was £20.4 billion, compared with the Budget estimate of £17.1 billion. Public sector net borrowing was -£18.1 billion, a £6.2 billion larger surplus than expected at the time of the Budget. These larger than expected surpluses reflect both higher than expected receipts and lower than expected spending. Spending within Departmental Expenditure Limits (DEL) was £2 billion lower in 1999-2000 than expected at the time of the Budget.
Table 2.1: Changes in the surplus on current budget and net borrowing
£ billion Outturn 1999-2000 | |
| Surplus on current budget 1, 2 | |
| Budget 2000 | 17.1 |
| Contribution due to higher receipts | 1.8 |
| Contribution due to lower spending | 2.1 |
| Contribution due to higher depreciation | -0.5 |
| 2000 Spending Review | 20.4 |
| Net borrowing 1, 2 | |
| Budget 2000 | -11.9 |
| Contribution due to higher receipts | -1.8 |
| Contribution due to lower spending | -4.4 |
| 2000 Spending Review | -18.1 |
1 Excluding windfall tax receipts and associated spending.
2 Figures may not sum due to rounding.
2.6 Economic developments since Budget 2000 have been broadly in line with expectations. A full updated assessment of economic and fiscal prospects will be published as usual in the Pre-Budget Report in the autumn. However, NAO audited assumptions and other assumptions which are relevant to projections of AME have been updated in this White Paper to incorporate the latest available information.
Sustainable Public Spending
Firm spending plans
2.7 Budget 2000 set a firm overall spending envelope for the next three years, 2001-02 to 2003-04. This envelope is consistent with meeting the Government's fiscal rules, including in the more cautious case, while providing scope for substantial new money for the Government's spending priorities as set out in detail in this White Paper. Consistent with the Budget envelope, over the next three years:
- current spending will increase by 21/2 per cent a year in real terms, in line with the Government's neutral view of the economy's trend rate of growth; and
- net investment will more than double, rising to 1.8 per cent of GDP in 2003-04 and thereafter will be set within this ceiling as a share of GDP, consistent with the net debt to GDP ratio remaining below 40 per cent in the medium term.
2.8 The spending figures published in this White Paper incorporate the following new information:
- adjustments to move from cash to resource accounting, as the Spending Review is the first to be conducted on a resource basis;
- an underspend on DEL in 1999-2000, with part spent on repaying debt and part carried forward to DEL in 2000-01 and 2001-02; and
- an underspend in AME in 1999-2000 and lower projections of AME compared with Budget 2000 for future years, leaving more spending available within DEL for a given level of TME.
Resource accounting
2.9 This Review is one of the major milestones in a long-planned programme of reform to modernise the system of planning, controlling and accounting for government expenditure by moving it onto a full accruals basis, in line with accounting and budgeting in the rest of the economy. The spending plans are presented in resource terms, in contrast to the Budget 2000 figures which were in cash terms. Table 2.3 includes lines which show the Budget 2000 profiles for DEL and AME adjusted onto a resource basis. These adjustments are off-setting - Total Managed Expenditure (TME) is unaffected. This allows the Budget and Spending Review figures to be compared on an equivalent basis. Details of the impact of resource accounting and budgeting (RAB) on DEL and AME are described in Annex B.
DEL underspend in 1999-2000
2.10 The Review sets firm three-year spending plans for the years 2001-02 to 2003-04 for all the main government departments. DELs for the first year of this Spending Review period, 2001-02, have been rolled over from the final year of the 1998 Comprehensive Spending Review, with some upward adjustments directed to priority programmes reflecting the Government's prudent handling of the economy and some changes reflecting end-year flexibility, discussed below.
2.11 The Government's spending framework allows departments to carry forward a DEL underspend against plans into future years - full end-year flexibility. This increases value for money for the taxpayer by helping to improve the planning of spending and avoiding end-year spending surges.
2.12 The Budget 2000 forecast allowed for a cautious £1 billion DEL underspend in 1999-2000 to be carried forward into 2000-01. But as shown in Table 2.3, the DEL outturn for 1999-2000 was actually a further £2 billion below the Budget estimate, accounting for a little under half of the estimated £41/2 billion lower TME outturn than expected at the time of the Budget.
2.13 Normal practice would be to carry forward this DEL underspend into the current year's spending plans. The Government has decided not to carry forward the full additional £2 billion underspend. The Government has instead decided to use £1/2 billion of the underspend to repay debt, thereby reducing future debt interest payments, and to carry forward £1 1/2 billion. Furthermore, rather than add all of this £1 1/2 billion to spending plans for 2000-01, the Government will, for prudent and efficient management reasons, spread the amount over this year and next, helping to smooth the path of public spending. As a result, £3/4 billion has been added to DEL in both 2000-01 and 2001-02.
Lower AME
2.14 The Government's prudent approach to managing the public finances and its success in reducing unemployment and tackling benefit fraud has led to further savings in AME. Revised AME projections, incorporating the expenditure effects of updated NAO-audited and other assumptions, are published to 2003-04 as part of the outcome of this Review in Table A1 in Annex A. These include updated figures for 1999-2000 to 2001-02, the years for which AME figures were published in Budget 2000. The fiscal projections are based on prudent assumptions, audited by the NAO. The significant changes, as set out in Table 2.2, are as follows:
- UK claimant unemployment is held constant at recent levels, unless the consensus of independent forecasters is for an increase. Independent forecasters expect unemployment to continue to fall, and the AME projections are based on the cautious updated assumption of claimant unemployment constant at recent levels of 1.12 million, slightly below the Budget assumption. Together with prudent and cautious estimates of the effects of spend to save projects and other measures detailed in Chapter 18, this leads to AME savings building up to £0.8 billion by 2003-04; and
- assumptions on market interest rates are also audited by the NAO. A softening in short-term market interest rate expectations (based on the market yield curve at 12 July) has lowered the path for debt interest payments within AME. The reduction in the level of government debt following higher than expected receipts from the sale of spectrum licences for third generation mobile phones, together with a revised DMO remit, has yielded further additional savings. Taking these changes together produces savings in debt interest payments of over £1 billion in 2001-02, rising to £11/2 billion a year by 2003-04 as the effects of reduced borrowing and lower debt accumulate. No account is taken in AME of the accrued receipts of around £1 billion from the sale of the spectrum licences themselves. In the autumn, the first of a number of additional parts of the spectrum which will be used for local broadband fixed wireless access will be auctioned. As with the proceeds from the auction of spectrum licences for third generation mobile phones, these receipts will be used to repay debt, thereby reducing future debt interest payments.
Table 2.2: Changes in AME since the Budget due to unemployment, social security and debt interest payment assumptions
| £ billion | ||||
| Changes from Budget 2000 | 2000-01 | 2001-02 | 2002-03 | 2003-04 |
| Due to updated assumptions on: | ||||
| unemployment and spend to save 1 | -0.2 | -0.4 | -0.4 | -0.8 |
| market interest rates | -0.2 | -0.4 | -0.2 | -0.1 |
| DMO remit | -0.2 | -0.4 | -0.4 | -0.4 |
| spectrum auction | -0.4 | -0.3 | -0.7 | -1 |
1 Includes social security benefits and Housing Revenue Account Subsidy spend to save and other service modernisation measures.
2.15 Forecast reductions in the components of AME in the current year have been added to the AME margin, as is the normal practice between Budgets. The AME margin has been set at £1 billion, £2 billion and £3 billion over the next three years - the same level as set in the 1998 Comprehensive Spending Review (see Table A1 in Annex A for a detailed breakdown of AME).
2.16 The overall effect of these and other changes is to reduce projections of AME by £2.2 billion in 2001-02 compared with the Budget 2000 projections (see Table 2.3), with the savings increasing in later years. These savings have been added to DEL, providing additional resources for public services.
Departmental expenditure limits
2.17 Table 2.3 shows changes to TME and its components - DEL and AME - since Budget 2000. This allows changes to the aggregates to be shown on a consistent basis by first adjusting the Budget numbers to allow for the move to resource budgeting and TME-neutral switches between DEL and AME, and then showing the new information available for the Spending Review. Further details at a departmental level are included in Table A8 of Annex A. The only change to TME is the 1999-2000 outturn of a £4.5 billion greater underspend and the subsequent DEL carry forward of £3/4 billion into each of the subsequent two years.
2.18 The Budget 2000 DEL figure for 2001-02 included the additional £3.1 billion allocation for health in that year announced in the Budget. The figure is increased by the £5.9 billion 'Budget 2000 addition' that remained unallocated in the Budget. After adjusting for the move to resource budgeting and DEL and AME switches, £3/4 billion is added to DEL in 2001-02 from the 1999-2000 carry forward and a further £2.2 billion addition is made to DEL from savings in AME. On a consistent basis, £43 billion of additional funding has been allocated to DELs by 2003-04 over the DEL allocations for 2001-02 set out in Budget 2000.
Table 2.3: Public expenditure aggregates 1
1 Figures may not sum due to rounding
2 Figures for DEL and AME beyond 2001-02 were not published in Budget 2000.
3 Includes £3.1 billion allocated to UK health in 2001-02
4 On a resource basis and including DEL/AME transfers, to allow comparison with Spending Review figures which are on a resource basis.
5 Includes unallocated Budget addition of £5.9 billion in 2001-02 (see Table C11 of the March 2000 Financial Statement and Budget Report).
6 £0.5 billion has been added to the AME margin for 2000-01.
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2.19 Over the three years covered by the Spending Review, TME is set to grow at an average rate of 3 1/4 per cent a year in real terms, in line with the Budget 2000 envelope for current and capital spending. Within this, current spending will rise by an average of 2 1/2 per cent a year in real terms and net investment will increase to 1.8 per cent of GDP by 2003-04 as announced in Budget 2000. Over the same period, AME spending will grow at an average rate of just 3/4 per cent a year. This firm control of AME spending, including as a result of savings on social security and debt interest payments, allows DEL spending to increase at an average rate of 5 1/4 per cent a year over the next three years.
2.20 With spending in line with the Budget 2000 envelope, and taking account of recent developments on government receipts, including proceeds from the spectrum auction, the fiscal stance over the next three years is on track to be at least as tight as set out in Budget 2000. A full updated assessment of economic and fiscal prospects will be published as usual in the Pre-Budget Report.
Strong Public Services
Focusing on outcomes
2.21 The Government's fiscal prudence has allowed it to free resources for Britain's public services while continuing to ensure that its tough fiscal rules are met and economic stability is maintained. However, at the same time as providing new funding for priority areas, the Government is making sure that both existing and new spending is targeted to deliver value for money and achieve the outcomes which the public want to see.
2.22 The quality of public services depends not just on how much the Government spends but also on how effectively it spends it. As Box 2.1 sets out, the Government's public spending framework has been designed to ensure greater efficiency and flexibility than in the past. As well as allocating money to departments, the 2000 Spending Review sets clear objectives and targets on which the Government will deliver. What matters to people are the outcomes which are delivered. Money has been allocated in return for agreements to achieve quantified improvements in public services.
Box 2.1: The public spending frameworkIn the 1998 Comprehensive Spending Review, the Government introduced a framework for public spending which complements the wider fiscal framework and is helping to deliver better value for money in public services:
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2.23 To ensure that departments focus on priorities, in December 1998 the Government published for the first time measurable targets for the full range of public services in the form of Public Service Agreements (PSAs). These targets set out the end results that taxpayers' money is intended to deliver and the service standards which the public can expect, and marked a fundamental change in the accountability of government to Parliament and the public. The PSA targets set in the Comprehensive Spending Review have been a strong motivation to deliver the Government's priorities from literacy and numeracy to restructuring of the Armed Forces. A full and detailed report on progress was published in the March 2000 Departmental Reports.
2.24 Building on these early successes, as part of the 2000 Spending Review departments have prepared new PSAs detailing the outcomes which they will deliver with the money they are being allocated. The new PSA targets focus on key strategic objectives. These new PSAs set out for every major government department an aim, objectives and the targets against which success will be measured - including tough targets on improving value for money and efficiency across the public sector. They will provide a clear commitment to the public on the improvements in services they can expect to receive for their money. Each agreement makes clear which Minister is accountable for delivering on the targets that underlie that commitment. Progress in delivering the targets will be monitored closely and will be reported in departments' annual Departmental Reports.
2.25 A separate White Paper on PSAs will be published shortly. The PSAs will be followed in the autumn by Service Delivery Agreements (SDAs) for every government department. The SDAs will set out in greater detail how the PSAs will be delivered, including operational plans and modernisation commitments. The Government will also be publishing Technical Notes later in the year to clarify terms and data definitions in the published PSA targets.
2.26 Public investment is set to double in the next three years. To ensure investment decisions are based on sound strategy and proper planning and management, each department will be required to have a Departmental Investment Strategy (DIS) which will set out its long-term strategic plans for investment, the condition and suitability of its existing asset base and the systems that will ensure value for money in delivery. A central aim is to improve the use of the Government's existing assets. This means working existing assets harder, looking at Public Private Partnership and commercial opportunities and disposing of those assets which are no longer required. Draft strategies have informed allocations in this Review and will be published for each department later this year.
Resource budgeting
2.27 The 2000 Spending Review is the first to be conducted on a resource basis. Box 2.2 explains the impact of this change. Resource budgeting provides better measures of the Government's spending and creates stronger incentives for efficiency and value for money. Further information on resource budgeting in this Review, including its effect on the departmental spending numbers, is provided in Annex B.
Box 2.2: Resource accounting and budgetingThe aim of resource accounting and budgeting (RAB) is to improve the management and measurement of government resources by scoring costs as they are incurred, not when they are paid for, and measuring the full economic costs of government activity, including non-cash items such as depreciation. Under RAB departments will produce the equivalent of the main financial statements from commercial accounts, in particular a balance sheet and the equivalent of a profit and loss statement, and use this information as the basis for planning and controlling expenditure. RAB also reinforces the distinction between current and capital spending by spreading the cost and consumption of capital over its useful life. Investment decisions are now informed by better information on the cost of holding assets, and there are new incentives for departments to manage their working capital - creditors, debtors and stocks. As the beginning of RAB going "live", the 2000 Spending Review marks the successful completion of a project first started in 1994. But it is only part of the story. Departments have already produced "dry run" resource accounts, and "live" resource accounts for 1999-2000 are in preparation. The relevant Select Committees of the House of Commons have also received a set of "shadow" resource-based Estimates from government departments. Legislation providing a statutory basis for the new system is expected to be in place in time to allow the new resource-based spending plans for 2001-02 to be presented to Parliament next year in resource-based Estimates. |
Cross-departmental reviews
2.28 Many of the improvements which the public most want to see cannot be delivered by a single government department or agency. For example, reducing crime and tackling deprivation require coordinated action across government, with different parts of the public sector working together to achieve common goals. To ensure that such issues are tackled effectively, the 2000 Spending Review has included 15 cross-departmental reviews focusing on key issues from crime reduction and intervention in deprived areas to science and research and the knowledge economy.
2.29 These cross-cutting reviews are designed to help tackle issues at their roots. Key outcomes of these reviews include a radical new strategy for tackling the problems of deprived areas, underpinned by targets to close the gap between the most deprived areas and the rest of the country; a new Children's Fund to tackle child poverty and its causes; and a National Treatment Agency for drug abusers, underpinned by a new treatment budget. Details of the outcomes of each review are set out in Section V.