Rein in Public Spending, Chancellor told

5 December 2005

Public spending growth must be reined back dramatically over the next five years for the UK to remain competitive in the much tougher economic conditions that are likely to emerge, business leaders warned today. Like thousands of indebted consumers, the Government has been living beyond its means, the Institute of Directors (IoD) said in its Pre Budget Report. Just, like those consumers, the Government must get a grip on its expenditure - spending cannot continue to race ahead of income.

Miles Templeman, Director General of the IoD said:

"Radical changes are required in the conduct of fiscal policy. We're spending far too much money in the wrong areas and not enough in the right areas, such as transport infrastructure. Overall though, we need to shrink the size of the state by introducing a new fiscal formula."

The IoD's new fiscal formula proposes:

• Regional Comprehensive Spending Reviews - incorporating a root and branch re-appraisal of public expenditure across the regions. There is a massive divide in public spending, which is potentially a huge drag on future growth for those regions with the largest state shares. Public spending is 26% of GDP higher in the North East (56%) than in the South East (30%). In Scotland, Wales, Northern Ireland and the North West, the Government accounts for around 50%-60%+ of GDP.
• Public spending cap - The IoD calls on the Government to restrain public spending growth to 1.5% per annum over the 2006-07 to 2010-11 period. This would bring the public spending to GDP ratio down from 42% to 40% of GDP. Public spending has surged over the past five years and must be brought under control. The IoD states that it is not sufficient for public spending to plateau-off as a proportion of GDP, it needs to fall.
• Third fiscal rule - The IoD calls on the Government to create a Third Fiscal Rule, namely a commitment to reduce the tax burden as a proportion of GDP, over the course of the economic cycle. A new survey shows that 83% of IoD members want the Chancellor to make a long-term commitment to reduce the tax burden as a proportion of GDP, with 66% wanting the tax burden to fall below 35% of GDP.
• Transport pump priming - Whilst overall public spending should be restrained to 1.5% per annum growth, the one exception to this rule should be investment in the transport infrastructure, which needs to rise significantly.
• Competitive markets in public services - public services need to be opened up to far more competition than currently proposed.

Miles Templeman, said:

"The warm glow the economy has given off over the past decade will soon begin to cool. UK economic growth will be less over the next decade than in the past. On the demand side we face a sustained slowdown in consumer spending with a gradually increasing savings ratio. On the supply side underlying trend growth is set to weaken as well.

"We've had short-term gains from higher spending, but we now risk the long-term pain from the Government being just too big."