Title: Public Expenditure
1Chapter 5
Sawyer The UK Economy 16e
2Size 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.
3Composition 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.
4Public 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.
5Trends 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.
6The 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.
7The 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.
8Growth 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.
9Growth 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.
10Public 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.
11Public 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.).
12Public 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?
13Public 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.
14Public 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.
15Spending 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.
16Local 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.
17Local 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.
18Education
- 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..
19Education
- 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.
20Social 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.
21Social 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.
22Health 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.
23Health 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.
24General 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).
25General 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).
26Current 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.
27Capital 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.
28Total 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).
29Public 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