§ In the coming year, some of the upward pressures on public sector spending are bound to remain with us. I have in mind, for example, last November's decision to spend more on industrial support and on special employment measures to ease the effects of recession. Next year the cost of special employment measures will be no less than £1 billion. This will make it possible to offer every unemployed school leaver a place on the youth opportunites programme by Christmas. And we hope to offer other 16 and 17-year-olds, unemployed for three months, places within a further three months. In all, 440,000 opportunities will be offered—twice as many as in 1979–80. In addition, the temporary short-time working compensation scheme is currently supporting nearly 700,000 people.
§ However, this need to spend more on some programmes cannot justify accepting the wrong fiscal balance. That is why we took the decisions that I announced last November to reduce most of the Government's other programmes by £1,400 million cash. Those substantial cuts will go a good deal of the way to offset the other increases that I have described. But they have not gone far enough to avoid the need for substantial increases in taxation.
§ It is worth recalling that this Government have not been alone in having to cut planned and actual public expenditure. Our predecessors had repeatedly to do the same. Such reductions are necessary if the burdens on the rest of the economy are not to become intolerable. They are essential to the fight against inflation. That has been the recent experience of almost every other industrial democracy. The economic conditions that call for lower public spending are a world-wide phenomenon.
§ Today's new public expenditure White Paper shows a planned volume of public expenditure next year that would be much the same as this year's expected outturn. Various developments since the White Paper went to print, including the withdrawal of the plans for accelerated pit closures, have made it prudent to increase the size of the contingency reserve. I shall also be announcing later in my speech additional expenditure to help with industrial fuel costs. Altogether, these will add about one-third of 1 per cent. to the volume of expenditure next year, 1981–82. The resultant planning total is more than 3 per cent. higher than we had intended. But despite the much larger claims of employment support and of social security it will still be nearly 5 per cent. less than our predecessors had planned.
§ Our decisions for the future are designed to ensure that the volume of spending falls after 1981–82. The public expenditure White Paper shows a planned fall of 4 per cent. by 1983–84. Whether we can spend even on that scale must depend on how far we can afford to do so. During the annual review later this year we shall be looking hard at the possibilty of further reductions in those plans.768
§ The House will find that the sheer size of public spending becomes much easier to grasp if one thinks not just in terms of the so-called volume of spending but in terms of actual cash paid out. The difficulty of controlling it also becomes clearer.
§ Last year—1979–80—we spent on programmes £77 billion in cash. This year—1980–81—the corresponding figure will be nearly £94 billion. Next year—1981–82—we will spend about £104 billion, cash. If debt interest is included, the rise is even greater.
§ An important part of the rise in total expenditure between last year and this has been due to the increase in the public services pay bill resulting from the Clegg commission and similar catching-up exercises, many involving staged settlements. The Clegg awards and staged settlements alone accounted for an increase of £2½ billion between the two years.
§ We have had to make provision for those consequences of the previous Government's incomes policies. But the significance of those consequences and the extent of the problem that they present have still not been widely recognised or understood. The pay bill for the public services in 1980–81 of about £30 billion is about 25 per cent. higher than in the previous year. This is twice as fast an increase as in the pay bill of the private sector. Much of the overall cost of pay settlements in the private sector has been offset by a reduction in numbers of people employed, or in hours worked. So the cash cost of Government has been growing much faster than the cash income of the rest of the economy that has to support it.
§ The immediate lesson is simple, but vital. After the recent large increases it is now both fair and essential that public service pay should grow more slowly. Pay, after all, accounts for as much as 60 per cent. of the major public expenditure programmes, such as education and health. This is why it is so important to work out improved ways of settling public service pay. Any new system must take proper account of all the relevant factors; the balance of supply and demand for particular skills as well as comparisons with terms and conditions in outside employment and—inescapably—the limits of finance available. Due weight will also need to be given to the expectation and intention of a continuing decline in the rate of inflation.
§ Experience over a number of years shows clearly the need for a system for the control of public expenditure generally which displays the consequences of spending decisions as plainly as possible. The present system certainly does not do that. This year, as for many years past, the figures in our White Paper are expressed mainly in volume terms at"constant" prices. But there is something inherently unreal in trying to plan and measure things in terms of what is rightly described as"funny money". Goods are not bought and people are not paid in the money of last year or the year before. They are paid in cash.
§ When the community, acting through the Government, decides to buy goods and services, it has to pay in money of the day, just like any private individual. There is, of course, a case for planning in volume terms as well. There is a clear need to plan the number of hospitals or roads or frigates that we are aiming to have in future years. But there is great danger in planning in volume alone. For there is then an inevitable tendency to assume that a given quantity of goods or services will definitely be available, 769 however much their costs may have risen. For this reason, it is essential that the control and planning systems should focus much more closely on the money actually spent.
§ I am accordingly making some important changes in the control and planning of public expenditure. These changes cannot be a substitute for the hard political decisions that have always to be taken. But they will enable those decisions to be taken with a much clearer appreciation of what is involved. They will help to displace the automatic assumption that what was once planned can always be afforded.
§ We have decided to make a major shift in the planning and control of spending from volume to cash. The introduction of cash limits by the last Government paved the way for this change. We now need to go a great deal further down that road.
§ In the first instance we shall, from the coming year onwards, change the way in which we operate the contingency reserve. This will now be a cash control. Previously, only decisions that increased the volume of spending during the year were charged to the reserve. Next year the control will be extended so that decisions to increase cash limits—in respect of pay or prices as well as in respect of volume—will be treated as a charge on the reserve. The reserve will be set at £2½ billion cash—about 2½ per cent. of the total of programmes. This allows both for the wider coverage resulting from the switch to a cash basis and for the increased provision, which I have already mentioned, to allow for developments since the White Paper.
§ Even more fundamental is the change that we shall be making in the way we go about future annual reviews of public spending. In planning public spending for 1982–83 we shall, from the outset, conduct our examination and discussions in terms of the cash that will be available for that year. This will change the whole framework and spirit within which decisions are taken. In some ways, it will make things more difficult for those who have to manage spending programmes—harder, indeed, for the Government as a whole. Departments will be obliged from the outset to form a view as to what their money will buy. That is bound to be less easy than just deciding what they want and then simply looking forward to receiving all the money needed to pay for it.
§ This is precisely the same problem as that which every family in the land has to face in planning their own spending. They may have to adjust plans, according to the way costs move and according to the availability of finance. For them, the focus must always be on how much cash is actually going to be available. It is high time for public spending to be subjected to similar discipline. This change to taking decisions in terms of cash will make a major contribution to improving financial management and will do much to support our other efforts to increase cost consciousness and accountability throughout the public sector.