Forward to the past

With this week's Spring Budget, New Labour has returned to the past.

The Spring Budget has traditionally been the time to reveal government policy on taxation, with the Autumn Statement unveiling plans for how to spend the money raised. But in 1993 Kenneth Clarke amalgamated these two events.

It seemed to make sense at the time - and emphasised the connection between what governments spend and how and from whom they get the money.

Despite the chancellor's desire to revert to old ways, the source of public funding remains the same - you, me and borrowing from the money markets (ultimately, you and me again).

But for anyone slightly confused as to what is currently happening with the government's tax and spend plans it is probably useful to go back to last year.

What has been the underlying factor shaping tax and spend policies, and will continue to be for at least another year or two, is the government's commitment to the previous administration's economic policies.

Broadly, these are to cap the tax burden and rein-in public spending. Within these self imposed constraints there is of course room to change things.

On the tax side, for example, the government declared in its pre-Budget report last November that it wanted to make the tax system fairer and more transparent, an encouragement to savings and an impetus to job creation.

On spending, the government has already demonstrated that within the overall total for all public spending (the control total - excluding cyclical spending on unemployment, privatisation proceeds and debt interest) it is possible to shift money from one department to another.

The NHS has already benefited from such reallocations. In the chancellor's Budget of last July, the NHS got an extra pounds1.2bn for 1998-99 on top of the previous administration's plans (which allowed around pounds1bn extra for the UK).

This extra allocation was drawn largely from the government's rainy day money - the contingency reserves - which were already included in the control total.

Then, last October, Frank Dobson managed to convince the Treasury to hand over a bit more money to tackle growing waiting lists, the rise in emergency admissions and the prospect of over burdened hospitals during the winter.

The one-off sum of pounds270m (plus pounds30m to be found by the NHS itself through efficiency savings) increased the NHS budget for 1997-98 at the expense of the defence budget. Again, total spending remained within the control total.

And so, since the May 1997 general election, the NHS has seen its budget increase in real terms by around 1.4 per cent after taking account of general inflation, and will enjoy a real increase of about 1.7 per cent for 1998-99.

If the chancellor sticks to his earlier plan to separate tax and spending decisions, no announcement on spending for the NHS in 1999-2000 are due until November's Autumn Statement.

On that basis, current (ie the last administration's) plans suggest a real cut of 3.25 per cent. The government won't stick to that and will be keen to take the credit for having spent far more on the NHS than the Tories had planned.

On the face of it the NHS looks to have done rather well in the circumstances. But what governments plan to spend on the NHS and what they actually end up spending have never coincided.

What they end up spending is invariably higher than what they had planned. In fact, the difference between the earliest plan and the final outturn for NHS spending can be quite enormous.

In the late 1980s and early 1990s, the difference between plans and outturns ranged from more than pounds1.4bn to nearly pounds1.8bn for the hospital and community health services in England alone.

So, even without a change of government, it could have been expected that the NHS would have received more than had been planned.

But the real increases it has already received - 1.4 per cent this year and 1.7 per cent for next - have been lower than the long run trend in real increases for the NHS.

Over its lifetime, NHS spending has grown at an average of about 2.5 per cent. Coincidentally, or perhaps not, this is similar to post-war trend growth of the economy.

Since 1979 the real growth in NHS spending has been a bit lower, around 2 per cent a year - but this is still greater than current increases.

Given that current and short-term government finances are looking very rosy - the economy is in the 'boom' part of the cycle, tax revenues are up, unemployment is down, inflation is low - surely we can afford to spend more?

According to many economists this is not the best time for governments to start spending. Additional spending in times of high economic growth - so the conventional Keynesian wisdom has it - can lead to overheating.

Boom can turn to bust, as many previous chancellors have discovered to their cost.

So, when governments have money they shouldn't spend it. Rather, they should save it and spend on the downward economic swing to ameliorate the worst effects of recession.

For those hoping for a major boost to NHS spending in coming years, the remaining hope is the government's comprehensive spending review, initiated last year and due to report by the end of this month.

It is essentially a programme budgeting and marginal analysis exercise to identify whether public spending is meeting the goals the government has set for it, and if not, how money can be moved around in order that goals are met.

The NHS Confederation submitted evidence to the review last year, and argued for a minimum real growth of 3 per cent a year over the next few years.

This implied at least an additional pounds700m cash for the NHS across the UK for 1998-99 (on top of everything else), and at least a pounds3bn cash rise on top of current plans for 1999-2000.

The government should start saving up now.

John Appleby is senior lecturer in health economics in the department of health policy and practice, University of East Anglia.