Hamish McRae: That was the tweak that was

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The Independent Online

Ten days to go to the Budget – and to judge by the ground-clearing leaks, a Budget in which the Chancellor will move from stealth tax increases to real ones.

Ten days to go to the Budget – and to judge by the ground-clearing leaks, a Budget in which the Chancellor will move from stealth tax increases to real ones.

For many people this will be a puzzle. Sure, he will have to put money funds into public services, but hasn't he got money coming out of his ears? What has happened to all those surpluses accumulated by the years of prudence? It is not as though the economy has slid into recession so tax revenues should be fine. Unemployment is down so the cost of benefits should be moderate. Interest rates are low so the cost of servicing debt will be down. And while there have been big commitments on future public spending, the increases are only just starting to feed through. So what's the problem?

The problem, in the phrase attributed to the US Senator Everett Dirksen is "a billion here, a billion there and pretty soon you're talking real money."

Every spending department claims to have a good case for spending more. We all know about the need for spending on healthcare and the Chancellor's commitment to that, but education and transport can make good cases too. The military budget, which over the past three decades has been the main area for cutting, cannot be squeezed any further and given the new responsibilities loaded onto our forces, may have to increase.

More than this, the Government has not really fostered a culture of parsimony. It spends lavishly on the most expensive office block in the country for MPs. It makes a mess of its relationship with Railtrack. It hires scores of new "special advisers". It creates new mayors, all of whom have to have new offices and hire their hangers-on. Devolution costs money, particularly when the Scottish parliament building ends up costing four times the number first thought of. The administration of an increasingly complex tax system adds to costs too. Then there is the Dome and offices for Lord Wallpaper.

Individually, these decisions may be defensible, but cumulatively the effect is desperately serious. For a while these additional bills could be offset by holding down general public sector salaries. Some 70 per cent of public spending (aside from transfer payments) goes on wages, so if you can shave off the odd half per cent you have money to do other things. But this is not sustainable in the long term, for there is a limit to the extent that growth in public-sector salaries can lag behind the private sector. And they are in catch-up mode.

The difference in the financial year that ended on Friday and the year before is shown in the first graph. This shows what has been happening to the public sector net cash requirement – public sector borrowing requirement– through the two years. As you can see, last year the Government was in huge and growing surplus. This year it has been bouncing along about square, but is expected to end up in modest deficit.

By historical standards being in surplus is quite unusual; the PSBR has usually been just that, a need to borrow. The middle graph shows how that reached 9 per cent of GDP under Denis Healey's chancellorship and not far below under Norman Lamont's. But the general trend of the size of public spending relative to GDP has been shrinking since the mid-1970s. The peak of government receipts actually came a little later, the early 1980s, when receipts were boosted by the early privatisations (right hand graph). But whether you look at spending or receipts, the 30-year trend of public spending does seem to be down. Each spending peak since the 1970s is lower than the previous one.

The most interesting question, then, in the forthcoming Budget, is whether the Chancellor is really tackling the "billion here, billion there" issue. He believes that a centrally funded system is the best way to provide healthcare. He is committed to widening educational opportunity. He wants to use the tax system to boost enterprise, to encourage people to start their own businesses. And whether he himself supports it, he is under pressure to use taxpayers' money to subsidise the people who want to travel by rail.

All this requires higher taxation. Up to now he has been able to manage with quite modest rises in taxation, cleverly introduced – that last little kick up in receipts on the right-hand graph is nothing to what went before. But we are moving towards the limits of what can be done by tweaking.

The issue for this Budget is not just how this particular chancellor happens to square the various demands on him. He is, by historical standards, an important holder of the office, but he won't be there forever. This issue is the bigger one of where the frontier between public and private should be drawn.

For a quarter of a century that frontier has been moving towards smaller government. Under Gordon Brown there has been a modest re-thinking but no substantial change – so far. Up to now the additional spending has been of the "billion here, billion there" variety. But that does not satisfy voters, for we feel we are not getting value for money. If we pay more tax we expect better services. Blaming a backlog of under-funding is not a credible argument when you have been responsible for the funding for five years.

We will see the bill for the supposed improvement in public services in 10 days' time. We will make up our minds whether that is acceptable – or whether we would rather pay less and make personal provision for our future instead, bearing in mind that on one issue, pensions, we will have to do both. The public sector will then have a quite short period to deliver a better performance. If it does, then the 30-year downsizing of the state may come to a halt. If it does not, then under some other chancellor, expect spending to revert to its long-term trend.

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