A new conversation on ‘spending wisely’

Today the Fabian Society publishes the first report of our Commission on Future Spending Choices, a year-long inquiry into the spending choices which will face whatever government comes to power in 2015. We set up the commission at a time when only people on Labour’s right were talking about tough spending decisions, because we wanted to make sure that middle-of-the-road opinion in the party didn’t get shut out of this defining political debate.  Being prepared to think through hard financial choices can’t be the preserve of particular factions or flavours of opinion, as both Eds have now shown in their recent economic speeches.  Tough decisions are a mathematical inevitability for anyone who wants to see Labour back in power.

Today’s report ‘Spending Wisely’ looks at the process for making spending decisions and calls for a new sort of conversation on public spending. We argue that politicians need to think and talk about ‘constrained alternatives’ when it comes to total levels of spending. With so much economic uncertainty the coalition is wrong to say there is only one credible path for expenditure after the next election, a date still two years away. However Labour needs to accept there are also tight limits on its room for fiscal manoeuvre. The party might be able to spend perhaps £20 billion more by 2017 than the coalition intends to at present (assuming the economy is finally starting to pick up). That would prevent the need for many of the post-2015 cuts the chancellor envisages, but it would not allow for overall departmental spending to rise. So even under this scenario, if Labour wants to spend more on key priorities, it will have to say where the money will come from.

Our second main argument is that we need a far more long-termist approach to spending choices. The commission proposes that the Treasury should publish a long-term expenditure statement in advance of every spending review to force ministers to set our how they see the balance of public spending changing over time. This would require the government to explain how their annual decisions fit into a larger story about the direction of expenditure over decades.

To show why this is needed, let’s compare the years 2007 and 2017. Public spending as a share of economic output will be almost identical in the two years, but its composition will have changed a lot. Spending on pensions and debt will be up; there will be little change to the amount going on health or working-age social security; but a big fall in how much is spent on education and capital investment. If ministers had to say all this in public, it would suddenly become much harder for them to take money away from areas of long-term importance such as early years or further education.

The commission also calls for wider structural reforms to embed long-termism into spending decisions. As well as new long-term expenditure statements the report recommends a return to a regular, planned cycle of spending reviews and a requirement that all policy decisions should include a full estimate of the costs and benefits in ten years’ time.

We also make a plea for better accountability when it comes to spending choices: the 2010 Spending Review was the most important political announcement of the parliament and it’s only official scrutiny was a one month inquiry by an over-burdened select committee. Future spending announcements should be published in draft for consultation and the Office of Budgetary Responsibility should become an agent of parliament, providing direct advice to MPs. We also think there should be a debate on splitting the Treasury Select Committee to create a freestanding Budgetary Committee to give public spending the fuller scrutiny it demands.

Today’s report is the first instalment. The commission still has more to do and in September our final report will set out firmer recommendations on the spending priorities for the next government. We hope it will be a source of inspiration for future ministers and a springboard for debate across the political spectrum.