Public Expenditure

1
Chapter 5
Sawyer The UK Economy 16e

• Public Expenditure

2
Size of Expenditure

• Total of Annual Managed Expenditure for the
  2002/03 was 418 billion and the estimate for
  2004/05 was 487 billion approximately 7,800
  for every person in the UK.
• The relative size of the public sector for
  2002/03 was 39.9 per cent (i.e. total Managed
  Expenditure as a percentage of GDP).
• Expenditure on social security transfers is the
  biggest single item of public expenditure and has
  been growing in significance.

3
Composition of expenditure

• Capital expenditure (capital formation) is a very
  small and declining element of public spending.
• The state acting in its role as a user of
  resources consumes about 50 per cent of public
  expenditure (final consumption expenditure plus
  capital formation).
• The remaining 50 per cent of public expenditure
  represents the transfer of income and resources
  from one section of society to another.

4
Public Expenditure Programmes

• The largest public expenditure programme is the
  payment of social security benefits, by the
  Department of Social Security, which amounted to
  105.3 billion in 2002/03. This represents
  almost one-quarter of Total Managed Expenditure.
  
• The Department of the Environment, Transport and
  the Regions (DETR) was responsible for 45.4
  billion between local government and regional
  policy (37.7 billion) and environment and
  transport (7.7 billion). The major element of
  the 37.7 billion is spent on education.

5
Trends in UK Government Spending

• Between 1984/85 and 2002/03 total managed public
  expenditure in cash terms increased from 158.3
  billion to 418.0 billion a 165 per cent
  increase or an average 9.0 per cent pa.
• The UK public sectors relative size is similar
  to that of other European countries. North
  American public sectors and that of Japan tend to
  be relatively smaller indicating institutional
  differences in the welfare state.

6
The Real Size of the Public Sector

• Real public expenditure (at 1997/98 prices) as a
  proportion of GDP averaged 40.8 per cent over the
  period 1963/64 and 1969/70. During the decade of
  the 1970s it averaged 45.3 per cent and during
  the 1980s the average was 45.1 per cent. Since
  1990 it has fallen to 39.3 per cent.
• The average size of the real public sector
  remains about the same as it was in the 1960s.

7
The Real Size of Public Sector

• The relative price effect well established that
  the input prices used to calculate nominal public
  expenditures rise faster than the output prices
  used in the calculation of nominal GDP, because
  wage and other input prices that go into the GDP
  calculation for the private sector can be offset
  against productivity increases.

8
Growth of Public Expenditures

• On the demand side increases in real per capita
  incomes provide a potential explanation for an
  increase in the quantity of public services and,
  therefore, public expenditure.
• Wagners Law can be stated in terms of certain
  public services having an income elasticity of
  demand in excess of unity for example, health
  and education services and public protection.

9
Growth of Public Expenditures

• The scope of the public services also changes
  over time. Education, health or personal social
  services are not homogenous. These are
  functional categories of public expenditure which
  encompass complex bundles of many specific
  services each reflecting a particular policy
  initiative.
• On the supply side the supply price increases
  reflecting general inflationary increases through
  the economy. Debt charges rise as interest rates
  increase public sector wages and salaries
  increase with inflation and many social security
  benefits, which are tied to the retail price
  index (rather than earnings), will rise.

10
Public Expenditure Reforms

• A number of reforms have been introduced over the
  past twenty years in an attempt to improve the
  efficiency and effectiveness of public spending.
  
• These have included contracting out
  marketisation the introduction of internal
  markets the use of value for money auditing and
  performance indicators.
• Public service agreements (PSAs) have been
  introduced to central government departments,
  requiring departments when negotiating their
  budget from the Treasury to present what are in
  effect business plans that clearly state
  objectives along with measurable efficiency and
  effectiveness targets.

11
Public Private Partnerships

• The introduction of the Private Finance
  Initiative (PFI) in 1992 was an attempt to use
  private sector finance and management to improve
  the efficiency and effectiveness of public
  services.
• When private and public finance combine within a
  project the question which arises is how should
  this be accounted for within the public finances?
  
• PFI allows situations to result in which the
  public sector does not own the assets (e.g. the
  public sector only needs to guarantee that it
  will use a hospital or a school etc.).

12
Public Private Partnerships

• Companies in the private sector compete with one
  another to supply these facilities. Having won
  the contract the private sector then works in
  partnership designing, building, and paying the
  capital cost of the building.
• One question which arises is does the PFI result
  in additionality? That is, does the availability
  of private finance increase total capital
  spending on the service or does private finance
  substitute for public finance?

13
Public Sector Employment

• On a head count basis about 19 per cent of the
  total work force was employed in the public
  sector in 2001.
• In 1999 local government was by far the largest
  government employer with 52 per cent of the total
  public sector work force employed in that sector.
  Within local government the greatest number are
  employed in education services 50 per cent of
  local government employees or 25 per cent of
  total public sector employees are to be found in
  education.

14
Public Sector Employment

• If employment in NHS Trusts are added back in
  then the numbers employed in health services in
  2002 were 1.2 million showing a 16 per cent
  increase between 1991 and 2002.
• The trend in total public sector employment is
  downward from a peak around the mid 1980s. There
  has been a 27.5 per cent decline since 1981.

15
Spending Review

• The Comprehensive Spending Review sets out the
  Governments public expenditure plans.
• The essence of the new public expenditure
  planning regime established a stable basis for
  the management of public services by setting firm
  three year plans for each department, and a clear
  distinction made between current and capital
  spending.
• Each department has set a control total - its
  Departmental Expenditure Limit. These cash
  limited budget constraints are fixed for the next
  three years.
• Some expenditure items cannot be fixed in this
  way, e.g. debt interest, social security welfare
  payments.

16
Local Government

• The United Kingdom is a unitary state in which
  local authorities act as agents of local
  government.
• Local authorities functions are both mandatory
  and discretionary. Local authorities are often
  mandated to locally deliver those services
  decided upon by central government. The main
  central government departments that local
  government relates to are (in England) those of
  Transport, the Environment and the Regions for
  Education and Employment and of Health and the
  Home Office. Local authorities in Scotland and
  Wales deal respectively with the devolved
  Parliament and Assembly.

17
Local Government

• Within the context of the UK public sector budget
  local government spends about 25 per cent of
  total public spending and about 8 per cent of
  GDP. In 2001-02 UK local government spending was
  about 98 billion of this 88.5 per cent was
  allocated to current expenditure and 5.5 per cent
  to debt interest. The remaining 6 per cent was
  taken up by capital spending (net of capital
  receipts).
• Local authority expenditure is funded from four
  main sources Revenue Support Grant (RSG) and
  specific grants, which are paid by central
  government non-domestic rates and the Council
  Tax.

18
Education

• Education expenditure is partly funded by central
  government and party by local authorities.
  Central government funds school education through
  a general block grant (the Revenue Support Grant
  RSG) paid to local authorities.
• The major expenditure allocations are on services
  for the under fives (nursery education), primary
  and secondary education and mandatory student
  awards, which are local authority grants to those
  studying at university. Together these
  expenditure items account for about 70 per cent
  of local authority education spending..

19
Education

• UK spends about 5 per cent of its GDP on
  education. Of this about 60 per cent is spent on
  school level education and 30 per cent is spent
  on higher and further education.
• The UKs pattern of resource allocation is not
  too dissimilar to that found in other
  industrialised countries as Table 5.11 shows.
• The proportion of the UKs GDP allocated to
  public education is about average.

20
Social Security and Personal Social Services

• Personal social services are provided principally
  through local authorities and mainly cover those
  public services which help the elderly, the
  disabled, children and young people, those with
  mental health needs and those with learning
  difficulties.
• The objective of the social security system is to
  ensure a basic standard of living for those
  individuals who are in financial distress whilst
  they are unable to earn as when they are, in
  retirement unemployed sick disabled or unable
  to work because they are looking after someone
  else who is dependent upon them. The benefit
  system also redistributes income over the life
  cycle.

21
Social Security and Personal Social Services

• Social security benefits are financed out of
  general taxation (about 50 per cent) employers
  national insurance contributions (about 25 per
  cent) and employees national insurance
  contributions (about 20 per cent).
• Spending on social security has grown
  dramatically since 1949/50. Cash spending on
  benefits amounted to 600 million in 1949/50
  rising to about 100 billion for 1999/2000.
  Clearly much of this is due to price changes. In
  real terms (constant prices) it represents an 800
  per cent increase in 50 years, equivalent to a 5
  per cent annual rate of growth.

22
Health Services

• Public sector health services are made available
  in the UK to all residents. The main provider is
  central government which establishes the broad
  strategic policy framework within which decisions
  are taken. Implementation of these policies and
  the operational administration of the specific
  services are carried out via local health
  authorities, health boards and other agencies.
• Health authorities and boards provide local
  strategic frameworks and leadership and each
  produces a Health Improvement Programme, for its
  local region, in partnership with primary care
  groups primary care trusts and NHS Trusts.

23
Health Services

• Between 1987 and 2002 demographic pressures
  averaged 0.8 per cent pa.
• Other drivers of health care expenditures include
  technological changes and the availability of new
  drugs which expand the scope of the service and
  offer treatments that were not previously
  available. These new drugs and technologies
  offer the potential of extending and improving
  the quality of life with the result that health
  authorities come under considerable pressure to
  adopt them with the consequence that (if adopted)
  health service budgets rise rapidly.

24
General Government Expenditure

• What is counted as public spending is the subject
  of definitions. The generally accepted
  international definition of public expenditure
  (GGE) includes the expenditures of central
  government, local authorities and where they
  exist regional governments. It does not include
  the spending of nationalised industries. In the
  case of the UK the borrowing of public
  corporations for capital spending is included in
  the definition of public spending (other items of
  public corporations spending is excluded).

25
General Government Expenditure

• GGE (X) is a public expenditure definition which
  excludes certain items of spending from the above
  definition. In particular it excludes
• interest and dividend receipts these are netted
  off gross debt interest.
• lottery financed spending.
• privatisation proceeds (these are treated as
  negative spending under the broader definition of
  GGE and will therefore reduce the public spending
  total).

26
Current Spending

• There are three elements to current spending
• government consumption expenditure this refers
  to the governments payroll costs plus the
  procurement of equipment and services from the
  non-public sector.
• transfers and subsidies transfers refer to
  expenditures designed to re-distribute resources
  from one section of the community to another.
  Subsidies are used to keep prices down eg
  agricultural prices or prescription charges.
• debt interest payments for borrowing to service
  the national debt.

27
Capital Spending

• This refers to expenditures on public sector
  investment ie items that have a return beyond the
  current accounting period, eg machines buildings
  such as schools and hospitals etc.
• It also includes maintenance spending on these
  capital assets. Capital spending also includes
  grants to support capital spending in the private
  sector. Net capital spending is gross capital
  spending minus depreciation.

28
Total Managed Public Expenditure

• Total managed public expenditure is best thought
  of as serving the purpose of enabling the
  Treasury to plan and control public spending.
  TME is divided into Departmental Expenditure
  Limits (DEL) and Annually Managed Expenditure
  (AME).
• In 1998 following the Comprehensive Spending
  Review about 50 per cent of public spending was
  fixed for three years these form the
  Departmental Expenditure Limits. The other
  approximately 50 per cent is the Annually Managed
  Expenditure this represents categories of
  expenditure where three year plans are not
  appropriate (e.g. social security expenditure
  debt interest and expenditure financed through
  local authorities own funds).

29
Public Expenditure Allocation 2002/03

• ( billion) (per cent)
• Departmental Expenditure Limits (DEL) 239.7
  57.3
• of which
• Department of Health 58.0 13.9
• Local Government 37.7 9.0
• Transport 7.7 1.8
• Defence 29.3 7.0
• Education and Skills 23.2 5.5
• Scotland 18.2 4.3
• Annually Managed Expenditure (AME) 178.7 42.7
• of which
• Social Security Benefits 105.3 25.2
• Central Government Gross Debt Interest 20.9
  4.9
• Locally Funded Expenditure 20.7 4.9
• Total Managed Expenditure 418.4 100.0