The Spending review hurdle

Posted on 13 Oct 2010 by The Manufacturer

Our recovery is well under way, EEF's Steve Radley...

Over the past month indicators on the health of manufacturing, including EEF’s own Business Trends Survey, have continued to show that the recovery is underway. And across the wider economy, growth accelerated at its fastest pace since 1999 in the second quarter.

While all this appears to be good news there is, nevertheless, an underlying feeling of nervousness about economic prospects beyond this year. One of the factors contributing to this caution is the forthcoming announcement of the Comprehensive Spending Review.

Looking further over the horizon, there are currently question marks about how the Government will sustain the recovery and support a more balanced economy. But over the next few weeks, we should hear a lot more about how the Government plans to take this forward.

Over this period, we should see the Governnent publish its Growth Strategy, its Manufacturing Framework, a White Paper on Sub-National Economic Growth (setting out how the new Local Enterprise Partnerships will pick up the baton from the Regional Development Agencies) and the finally the results of its Comprehensive Spending Review. The last of these will be the most eagerly anticipated as it will decide how much money is available and how it will be spent. Getting the decisions on this right will be critical to the success of rest of the Government’s economic strategy.

The Budget statement before the summer provided a pretty comprehensive picture of the process of fiscal consolidation and businesses were not left wondering if there would be more bad news on higher taxes further down the line.

We’ve had some of the headlines on spending, but with the Spending Review announcement now a matter of weeks away, is the coalition winning the argument for cuts and will we be left with the same degree of certainty on spending as we have been on tax? There has been more than a decade of real terms increases in government spending but over the course of this parliament this will go sharply into reverse as most departments have been asked to find savings of between 25% and 40%.

As the announcement gets closer, there is growing concern about what this will mean in practice.

In principle the coalition is right to be ambitious about eliminating the structural deficit before the end of this parliament. Delivering a competitive business tax system, ensuring our schools provide world class skills and upgrading our infrastructure are all necessary, but much more difficult when HM Treasury’s coffers are bare. But with the foundations of the recovery still looking somewhat uncertain, it will need to be flexible in its spending decisions.

However, the starting point of committing to further real terms growth in the Health and Overseas aid budget combined with a significant reduction in capital budgets wasn’t necessarily the right one. Funding for the areas that will support productivity and long-term growth and ultimately rebalancing across the economy will now have to work a lot harder.

That’s not to say it can’t be done. This process is inevitably going to be extremely challenging for the coalition, public services and businesses which count government as a customer. But the Spending Review decision must meet four key tests. Firstly, they must be clearly aligned with a statement on the government’s priorities for rebalancing the economy and a framework for growth. They must also, alongside a raft of reviews and consultations, place a greater emphasis on cost-effective delivery of services, particularly in areas such as skills, innovation and energy.

While the Spending Review will also take a long hard look whether there is a role for government in delivering some services at all, it must also think differently about how it can work with and leverage private sector involvement. For example, government R&D spending can complement and increase business investment in innovation and greater use could be made of user charging for some high-value business support. Finally, throughout a period of further significant policy flux, the Spending Review must provide certainty and stability about which programmes and areas of government support will continue to be funded, even if aspects of delivery are subject to further reform.

The next few weeks will be an exciting time for policy wonks but more importantly, they will set the course for our economy over this Parliament.