Letter: Growth will not pay for Labour's plan

Click to follow
Sir: The Labour manifesto notes that education spending as a proportion of Gross Domestic Product (GDP) has fallen under the Conservatives and states that, over the course of a five-year parliament, the proportion of GDP spent on education will rise. Labour's policy is thus to ensure that, by the final year of a Labour government's first term of office (2001/2), a higher proportion of GDP will be spent on education than was the case in the Conservative government's final year in office (1996/7).

Many will applaud this commitment. However, it is worth examining it in the light of the public finance projections for the years to 2001/2, as set out in the November 1996 Budget Red Book. These suggest that Labour's commitment can only be achieved by increasing taxes, increasing borrowing or cutting other core areas of spending (such as defence or the NHS), as compared to current projections.

In 1996/7 public sector education spending amounted to around pounds 35bn (4.7 per cent of GDP), whilst total Government Expenditure (GE) amounted to 41.3 per cent of GDP. The Red Book projections for the years to 2001/02 forecast that GE as a proportion of GDP will fall to 37.5 per cent by 2001/2.

The Red Book projections make some demanding assumptions regarding future growth in real GDP. GDP is assumed to grow on average by an above trend 2.8 per cent per annum in the five-year period from now until 2002. Moreover, the projections assume that, by 2002, the economy will have grown at a rate of 2 per cent per annum or more during each of the nine years 1993/4 to 2001/02. Treasury figures for UK GDP growth, from 1855 onwards, show that the UK economy has never grown by 2 per cent or more in each of nine consecutive years. The high GDP growth rate assumptions used in the Red Book projections must enable the assumed cost of social security to be cut rapidly.

The Red Book projections all the way out to 2001/02 do not analyse GE between its constituent parts. However, it can be realistically assumed that spending on education is projected to fall as a proportion of GDP broadly in line with the rate at which GE falls as a proportion of GDP. On this basis, then by 2001/02 spending on education would be some pounds 4bn per annum lower than if it had been held at the same proportion of GDP as it was in 1996/7.

If Labour wishes to honour its manifesto commitment by increasing education spending as a proportion of GDP by even a (modest) 0.2 per cent of GDP (ie from 4.7 per cent in 1997/98 to 4.9 per cent in 2001/02), this would imply an education spend in 2001/02 some pounds 6bn per annum higher than projected. This is equivalent to raising the rate of employee National Insurance contributions from 10 per cent currently to around 12.5 per cent.

It is virtually inconceivable that this extra pounds 6bn could come from economic growth and consequent reduced social security spending. The current projections already make some heroic assumptions in terms of high GDP growth rates.


Head of Economics

Chantrey Vellacott

London WC1