This great public spending spree will soon end

Revenue is only creeping up, while spending is whizzing away. The Treasury has lost its leverage

Public spending has shot out of control. Gordon Brown knows it, which is why he warned Cabinet colleagues that they were "close to the waterfall". Civil servants know it because they are trying to cram through spending projects before the taps are turned off - and they are warning firms bidding for contracts that next year that money won't be there. And I suppose we taxpayers know it, at least intuitively, because we sense vast amounts of public money being wasted.

But what none of us know, including the Chancellor, is how we will react when the brakes come on again this autumn. There will be squeals of "the cuts", sure, for officials hate being told they cannot spend money. But we don't know how savage the slow-down, how easy (or difficult) it will be to re-establish control, the effect on the economy and indeed on public services themselves - and of course the political fall-out as the scale of the waste becomes clear.

What has gone wrong? The easiest if rather crude way to see what has been happening is to look at revenues and spending this financial year. In the first quarter, (April to June), the Government had to borrow £14bn, half the total it is forecast for the full year. The reason is simple: revenue is below forecast, spending is at about forecast.

Take the figures for June. This year income tax brought in £7,687m, but that was down on last year's June figure of £7,828m. Corporation tax was lower too. Revenue rose from some other taxes, such as VAT, but had it not been for the rise in National Insurance Contributions, the total tax take would hardly be up at all. The rise in NICs is not really paying for more spending on health, as it was supposed to. It is plugging the gap in tax revenues.

Now look at spending. In June this year central Government spent £30,719m. But last year it spent "only" £27,477m, so the rise this year is well over 10 per cent.

Of course that is just one month. But you see the point: revenue is at best only creeping up, while spending is whizzing away. This is in sharp contrast to the position throughout Labour's first term, when tax revenues surprised the Treasury by generally coming in higher than expected, while spending often came in lower than planned.

The fact that the Treasury has been wrong-footed on its sums is bad enough. But the difficulty has been compounded by something almost more alarming. It has lost its leverage over how the spending departments used the money.

The structure of government requires the spending departments to come up with inflated bids and the Treasury to haggle them down. This annual dance of the mandarins, the autumn spending round, starts in September and it finished in November. In the first term, the Treasury had the lever of the pre-election statement that it would keep to the Tories' spending plans. This device, designed to reassure voters, was useful in frightening the spending departments. As the Chancellor's sums turned out better than expected he could then dole out additional pots of money for Treasury pet projects. The effect was that departments learnt to brown-nose the Treasury through the winter so they got their few millions extra announced by the Chancellor in his budget. They bitterly resented this micro-management, but learnt to play the game.

After the election, the game changed. Mr Brown, under pressure to improve public services, thought he could continue to micro-manage when the money taps were turned on. But saying "we'll give you not quite enough money to do all the things you have to do and if you want more you must tick our boxes," is different from saying "here's another 7 per cent - go spend it".

So Whitehall went on a huge spending binge, similar in a way to the spending binge of the private sector during the dot-com bubble. It has gone on a hiring spree, dreaming up all sorts of jobs in an effort to make itself more responsive to perceived needs. The dot-com companies had done the same, for they too had suddenly been given pots of money they had never had.

The Treasury looked on aghast, but because it gave the money upfront, it had no power to do anything about it. Indeed it never had a chance, for all it had to try and steer the departments was the rear view mirror. Remember all those statements in successive Budgets about the need for value for money and spending being properly audited? Great in theory; the trouble is that by the time the auditors step in the money has already been spent.

Now, this autumn, the Treasury has power again. This spending round is going to be more like the spending rounds of the first Labour Government. The difference is that instead of having a spending limit set by the Conservatives, it has a spending limit set by the Government's own ability - or rather inability - to find the dosh.

The word has already got round. A friend was advising on an urban renewal project the other day, helping show the junior minister round, and talking about what might be done and how much it might cost.

The minister bounced up and down, saying "oh, yes, great idea, really admire the spirit of your young people," or some such rubbish, as junior ministers do. The official minders from the department, to their credit, made it absolutely clear there wasn't the money any more. The taps had been turned off. The message from the Treasury has already got through.

The initial message will be that the departments can have the increments that have already been agreed, but there won't be any more. So there will be squeals. Expect these to start in the press in the coming weeks as the departments try and muster press and public support for their pet projects.

The interesting thing will be whether, given the fall-off in revenues, the Government can even stick to its present spending plans. Revenue forecasts have been set on the assumption of growth of more than 2 per cent and we will be lucky to get 1.8 per cent growth. Clearly revenue is already falling short this year, and the crucial question is whether it will recover next year.

My guess is that the Chancellor will bust a gut not to cut spending below pre-stated plans this year, increasing borrowing if necessary to do so. It is, shall we say, a delicate moment in career terms and this is not the time to admit he has made a mess of his forecasts.

But next year it will be different. Either growth will have recovered, and the "you have what you have been told but no more" line will hold spending down enough to squeak by. Or growth will disappoint and cuts can be blamed on the global downturn, the fact that world interest rates have risen, our export markets in the eurozone have under-performed, whatever. Either way, the great public spending splurge of the early 2000s will be history.

We should all, as taxpayers and citizens, hope then that some lessons will be learnt. Among these, I suggest, is that when more resources are fed into a bureaucracy, that should be done thoughtfully and cautiously. All civil servants should be made to ponder whether they are really getting value for money. And micro-management by the Treasury is not the path to a better public service - particularly when the Treasury has surrendered its most effective weapon - the power to just say "no".