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A quick primer

• Evan Davis | Notes on Real Life |
• 4 Oct 07, 03:48 PM

For those caught short by the possibility of an imminent major financial statement (which could even be on Monday) here’s a quick guide as to what it is and what to look out for.

What is it?

This is a combination of two big parliamentary financial statements.

First, the Comprehensive Spending Review sets out spending plans for each department for the three years 2008/09, 2009/10 and 2010/11.

Second, the annual Pre-Budget Report (which is normally in late November) which sets out the government’s forecasts and projections for the economic growth, and for its own tax, spending and borrowing until 2012/13.

What do we already know about the statement?

We already know the spending totals for the next three years (they were set out in the Budget and should be confirmed in the CSR). What is new is the departmental allocation of those totals.

We also already do know a number of departmental budgets, most importantly:

• Education, which gets a real spending increase (i.e. above inflation) of 2.2% a year
• ±«Óătv Office / MoJ combined which get 0.7% a year real cut
• Defence, which gets a 1.5% real increase each year

We also know that spending on the running costs (or administration) of Whitehall departments is set to be cut by an ambitious 5% a year for the three year spending review period.

What to look out for?

1. A possible downgrade of the government’s economic forecast for next year.

In the March Budget, the Treasury used a forecast of 2.5% growth for the UK economy next year. At the time, independent forecasters said it would be 2.3%. Now, independent forecasters say 2.1%.

Mr Darling should probably cut the forecast by at least a quarter point. He may choose not to – but would then look incautious in his assumption.

2. General spending restraint.

The total spending figures already set out tell us that spending will grow at 2% above inflation for the next three years. That compares with a rate of 3.2% over the last ten years. These figures will simply be confirmed – but lets not forget the overall story.

To put it at its simplest, for public spending, the party’s about to end. We’re in the last year of it.

Crucially, over the last ten years, public spending has grown faster than the rest of the economy. Over the next few years, it will grow more slowly than the rest of the economy.

This implies that the share of national income spent by government will slowly fall from about 42.6 % this year, to 42.1% in 2011.

It also implies that the chancellor’s plans “share the proceeds of growth” using the Conservatives definition of that phrase.

3. The NHS is about to feel a squeeze.

Health is the most interesting department to await its spending settlement.

It will do far better than other departments in this tight spending environment – but it will still feel like dramatic retrenchment. Spending there has been growing at over 6.2% a year over the last ten years. It’s likely to be more like 3.5% now.

Also look out for the other departments though - , local government, , will all find out their fate.

4. The government’s is probably borrowing slightly more than they thought at the time of the Budget.

It has become something of a tradition for Gordon Brown to rattle through the borrowing figures in his Budgets and pre-Budgets. In fact, in every Budget and pre-Budget since 2001 with only one or two exceptions, Mr Brown has had to admit his borrowing is worse than he had previously thought.

We will have to see how fast Alastair Darling can read lists of numbers when he stands up. But he will probably at least have to follow his predecessor in confessing to higher than expected borrowing.

That’s because so far this financial year, the data indicates tax receipts are coming in below the forecasts in April (companies in particular are not paying as much as expected).

The most important measure of borrowing is the so called “current balance” or “current budget” which is the borrowing measure used for calculation of the Golden Rule. It is the amount of borrowing which is not used to cover investment spending, but is used to cover day to day spending. (I suppose one can say it is like the government’s credit card borrowing, rather than the mortgage to buy a house!)

At the moment, the government’s Golden Rule implies this measure should balance out over the economic cycle, so that any deficits are offset by surpluses. On the government’s assessment, we are just in the first year of a new economic cycle.

Back in the March Budget, Mr Brown expected to have a deficit of £4 billion this year, (a slight improvement on the £4.7 billion last year). However, this year’s borrowing figure might now have to be upgraded to five or six billion.

It is not ideal that we now enter a possible economic slowdown, with the current Budget in deficit. There has not been a surplus in the Golden Rule measure of borrowing for six years.

5. There will be something else as well. A rabbit out of a hat.

The Pre-Budget Report is not really an occasion to announce tax changes – that’s for the Budget.

But chancellors can do as they please, so don’t be surprised if there if some tax change is announced. Or indeed, if there is some other dramatic measure on the day. In fact, I’ll re-phrase that. Be surprised if there is not some other dramatic measure on the day.