Election winner faces spending time bomb

The next government is almost certain to miss its public spending targets because of runaway growth in the health and social- security budgets, according to research published today.

A paper by a Treasury adviser suggests it will be extremely difficult to stick to the spending plans set by Kenneth Clarke in the last Budget, to which both the Labour Party and the Conservatives are committed.

It was only the lower than expected inflation during the recession that allowed the Government to hit its cash-spending targets, so the latest plans could turn out to be a time bomb for a Labour government. If Labour wins on 1 May, Gordon Brown's first budget is expected to be on 1 July.

The findings show that government expenditure since the last election has grown unusually fast, given the state of the economy.

The paper, by Nigel Pain, the Treasury "wise person" Martin Weale and Garry Young, of the National Institute for Economic and Social Research, comments: "Perhaps the most curious aspect of the period is that the Government has managed to create an impression of tight control of expenditure since 1992."

Other independent experts agree with the pessimistic National Institute analysis. Andrew Dilnot, director of the Institute for Fiscal Studies, said: "Whoever is in power, whatever happens, these spending plans mean a real bust-up.

"If they are met, there will be dramatic cuts in public services. If they are not met, the public finances will be in severely bad shape. Either way, the consequences are stark."

Mr Dilnot said it would not be impossible to hit the targets, but he thought politicians had no idea of the consequences this would have for public services. It would mean savage cuts in areas such as non-acute healthcare and higher education, he predicted.

Officials privately concede that government expenditure has grown rapidly in real terms since 1992 and describe the current plans as "ambitious". The targets Mr Clarke set out in the Budget allow for real expenditure growth of only 0.3 per cent in 1997/98 and 0.4 per cent in 1998/99, compared with a five- year average of just over 3 per cent a year. Mr Weale said yesterday: "We don't think the plans are credible. The social-security and health budgets are running out of control."

Health and three components of social security - housing benefit, disability allowances and income support - have expanded far faster than normal, given the state of the economy. Spending on health and social security amounted to more than pounds 142bn, or nearly half of the total in 1995/96, the last full financial year for which figures are available.

The paper says that after the last election "expenditure rose by more than can be accounted for by a normal response to the recession and has remained high now the recession is over".

It is the high levels of government spending since the last election that have left the Government's finances some pounds 14bn deeper in the red than they ought to be at this stage of the economic recovery. The "black hole" is down mainly to rapid growth in health and social security spending in inflation-adjusted terms.

The authors calculate that tax revenues have been much as expected, contrary to the popular myth that there has been a shortfall in taxes in recent years. The variations in receipts from year to year have been "well within the normal error margins".

However, they do predict that revenues during the next three years will fall below the Treasury's forecasts, because they are not as optimistic about growth prospects.