26 | Big Picture
The consequences of failing to impose a binding rule on
public spending growth can also be seen by comparing Chart 1
with Chart 2. Chart 1 shows the TME-GDP ratio based on the
new rule. Chart 2 shows the TME-GDP ratio based on 3 per cent
per annum real public spending growth. The ultimate differential
in the TME-GDP ratio is enormous. If one assumes negative
dynamic feedback effects � a lower GDP growth rate from a
progressively higher tax burden � then 3 per cent TME growth
gives rise to a TME-GDP ratio of 50-60 per cent potentially.
Given the electoral cycle, it is unlikely there will be any
sweeping commitments � from Government or Opposition � to
expenditure restraint below 2 per cent per annum for the next
CSR beyond 2010-11. Consequently, we need to try to lift the
debate on public spending above short-term political
considerations and focus on the long-term direction of
expenditure as a share of the economy.
The new framework would be simple and clear and set public
spending at a level the economy could reasonably afford and no
more. The 2 per cent limit would cover all public spending
(Departmental Expenditure Limits and Annually Managed
Expenditure) and whilst not being absolutely binding from one
year to the next, would be binding over the set 5 year period.
The new structure would provide a very important signal to
domestic business and foreign investors that the size of the state
was likely to move in one direction only � unless of course GDP
growth was sustained below 2 per cent per annum. If business and
international investors were clear on the direction of the state,
they would, presumably, be more inclined to invest in the UK �
ceteris paribus.
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