Over the course of the next two months the government will be making some difficult decisions as they set budgets for 2015/16 as part of the 2013 spending review. Departments along with representation organisations like EEF are in the process of developing recommendations and feeding into the Government's decisions process.
It is difficult to consider spending decisions in 2015/16 without taking into consideration the current economic climate. The current economic and fiscal context, with all the risks and challenges that that entails, will have a bearing on the path of public finances and economic growth. Ignoring this context is risky.
The most recent GDP data provided a much needed positive surprise with growth coming in and 0.3% in the first quarter of 2013. That said, taking a longer time perspective makes it clear that the economy has shown little signs of growth for the past 18 months. With a lack of demand permeating the UK economy, investment and trade continue to struggle and the task of rebalancing the economy looks as daunting as ever.
Public finances are similarly grim – the lack of growth along with the government's budget and consolidation decisions have delayed public finances getting back to a more level footing. Given this, as we think about the implications of setting budgets for 2015/16 in the upcoming spending review we can't help but question the appropriateness of the government's fiscal framework and the path of consolidation that has been set. At a time when stimulation in the economy is severely lacking, consolidation has held growth to a much lower path than it otherwise would have been and there is more to come.
With challenging economic conditions the focus needs to be on growth
Unfortunately in the current environment there are no easy choices so the government will need to make some trade-offs. The good news though is that there are options available and the fiscal framework set out by the government does afford some room to do more for growth.
Sticking with the current plan will continue to restrict growth. While providing a clear path for reducing the deficit, the implications of the current spending limits for departmental spending and for growth are large. Departments have already undergone significant cuts in previous spending reviews and further cuts are likely to make it difficult for departments to achieve the outcomes set for them. The current path also means government will continue to drag down growth.
Growth can be stimulated by more capital spending. Capital spending has the highest growth multiplier so the most significant and direct impact the government can have on growth is by increasing capital spending. Living within the spending limits set in Budget 2013, however, would require additional savings so more capital spending could be financed by reprioritisation and the government would also face the challenge of deploying additional funding quickly.
Relaxing the ring fences will ease pressure on budgets that are important for growth. Health spending has been one of the fast growing areas of government for the past decade and has not been placed under the same pressure as other departments despite large potential for savings. Research by the OECD suggests that public health spending has the potential to make the most significant contribution to consolidation without harming health outcomes.
It is not just about spending; the UK needs an overarching growth plan to drive decisions
Spending decisions should form part of a concerted action by government to drive more growth. A long term strategy for manufacturing was identified by 53% of manufacturers as one of the top three changes that would encourage more investment in the UK. EEF's Route to Growth sets out our view on an industrial strategy that would provide greater certainty in the policy environment that businesses seek.
The government's fiscal strategy also needs to be guided by a focus on growth. We think this means continued commitment to bringing down the deficit, more funding prioritised towards growth and spending areas that are vital for the long-term competiveness of the UK being protected.
Our full spending review submission will be published in the coming weeks. Stay tuned for more.