British Governments Use of Spending Reviews - Essay Example

? British government’s use of Spending Reviews A spending review is a process which is initiated and controlled by the treasury department. The process is responsible for government- resource allocation and greatly depends on the priorities of the government at that point in time. The spending review budgets are known not to have any legal backing and they are implemented annually. The government has the authority to alter the plans in the budget. The United Kingdom pre-budget reports have increasingly been used to announce any alterations in the spending plans. This essay seeks to critically analyze the success of British government in using spending review in the execution of government strategies. The labor government has been using spending reviews from 1998 to the year 2007 to set out spending plans. The departmental expenditure limits (DELs) covers the predictable spending of the government. This includes spending on hospitals and schools. Annually managed expenditure (AME) covers the public elements that are driven by demand. Examples include debt interests and social security spending. The spending review cover three years but they occur annually. The last year of a spending review is subject to reassessment in preparation to the next spending review period. The labor government increased spending which necessitated tight spending plans between the April 2008 and March 2011. According to the treasury, the public spending was expected to fall. The fiscal projections indicated that tax receipts were set to be increase over the active three year period. This was the only way to meet the borrowing forecasts of government (Corsetti & Muller 2009). In the previous four years, the labor government had increased public spending. The British government predicted that total managed expenditure (TME) would be ?587 billion in the period between 2007 and 2008. This was considered the broadest measure of the government expenditure. The amount was equated to roughly 43 percent of the British national income (Floud & Johnson 2004). The previous year, just before the labor government came to power, the government has spent roughly 41 percent of the national income. This was between 1996 and 1997. This represented roughly a 2 percent increase of the national income in the gross public spending (Hills & Stewart 2009). This is equivalent to ? 28 billion in the 2007 terms. For the first two years in office, the labor government maintained the conservative spending plan. This was in accordance to their manifesto promise from 1997 to 1999. During that period, there was s robust economic performance and the public spending was seen to decline with regard to national income. The labor government based its spending plans on the comprehensive spending review prepared for the year 1998. This was buoyed by the spending reviews from 2000 to 2004. This was later affected by the economy-wide inflation which was also referred to as real terms. There was significant departmental under spending. As a result the economic performance was resilient between 1999 and 2000. The 2007 march budget increased the education spending to 77 billion pounds (Hills & Stewart 2009). This was equated to 2 percent annual average in real terms. The increment was seen to be slower than the education spending. In the overall, it was still a cut. However, this increment was expected to grow from 1999 to 2008. Over the same period of time, the average increment was 5.5 percent annually in real terms (Floud & Johnson 2004). The plans of education spending led to a spending fall in the national income (Giudice & Kuenzel 2012). The labor government manifesto had committed to increase education spending in the 2005 election. During the period the labor government remained in power, the spending increment in education sector was supposed to be maintained. However, this had an impact in the ability of the British government to deliver on other aspects of education in the United Kingdom (Corsetti & Muller 2009). The 2006 budget announced that the government intended to increase funding the private education sector. The United Kingdom government set to release over 7000 pounds per student in private schools between 2005 and 2006. The government of United Kingdom was said to be undergoing increasing fiscal deficit crisis. In the year 2008, the British government had an extremely terrible credit situation. This caused the economy of the United Kingdom to remain stagnant. The coalition government had to lay down a policy to counter the rising public debts and streamline the balance of the economy (Giudice & Kuenzel 2012). Therefore, the United Kingdom coalition government came up with strict spending cuts. George Osborne announced the spending review in 2010, in his capacity as the Chancellor of the Exchequer. Spending review is known to come up with fixed budgets for every department (Hills & Stewart 2009). Each department is supposed spend the allocation judiciously in order to enable it function effectively. For the coalition government, the spending review is supposed to cover from 2011 to 2015 in the United Kingdom (Floud & Johnson 2004). This was meant to indicate the commitment of the coalition government in the United Kingdom in order to overcome the increasing debt in the economy (Giudice & Kuenzel 2012). The move is supposed to counter the effects of the credit crisis. This translated into an overall spending that that amounts to over 80 billion pounds. This is supposed to continue up to 2015. According to the coalition government, the state is committed to bringing to an end the dangerous cycle of borrowing finances from diverse agencies. The move is supposed to steer economic growth and reforms of both the public and private sector in the United Kingdom. The spending review is welfare based and is seen as a plan to elevate the social status of the poor in the society. It is also seen as a fair manner of distributing wealth in the United Kingdom (Hills & Stewart 2009). The nature of spending review process requires regular accountability and reporting. The spending review encourages loans and equity schemes and cut down on business support. Over 150 million pounds has been allocated to equity investments in next few years. The spending review is the basis of deficit reduction initiative by the coalition government in Britain (Peshkov-chow 2010). The coalition government has the urgent priority to bring economic stability and sustainable growth. The United Kingdom is spending 43 billion on the interest on the debt. This is more that the amount spent by the united kingdom in schools. Therefore, reducing the deficit, as advised by IMF, is vital in enhancing economic growth (Giudice & Kuenzel 2012). The departmental budgets had to be slashed in order to cut on the growing deficit in the United Kingdom. The spending review has been helpful in determining the capital spending in the United Kingdom. As a result, the spending review identified the capital projects that carry the highest economic value. In doing this, the United Kingdom coalition government has had to analyze the contractual commitments of the labor government. The coalition government has had to increase the capital amounts by over 2 billion pounds annually by 2014 and 2015 in relation to the budget plan (Talbot & Baker 2009). The current move by the spending review process has no immediate impact on the British economy. The spending review made the social housing in the united kingdom more responsive and fair so that to make people access social housing (Peshkov-chow 2010). Capital investing in social housing has caused the government to plan for over 140,000 affordable homes over the spending review duration. The government of United Kingdom has allocated additional 2 billion pounds to the social care in the year 2014 and 2015. During the labor government’s first spending review period, the labor government delivered increased departmental spending. The inflation turned out to be lower than the forecasts causing the government to reallocate funds to DELs and AME. The initial 1998 forecast, under the labor government, indicated a 2-6 percent growth in real terms. At the same time DELs was to grow by 3.7 percent annually (Peshkov-chow 2010). AME grew by 0.5 percent. The situation allowed the labor government to increase DEL by 5.5 percent annually in addition to preserving overall TME projected growth. Failure to deliver the initial spending cash caused a TME growth to rise to only 3.3 percent (GB Treasury 2010). The growth turned out to be 3.4 percent. The 2000 and 2002 spending reviews period realized accelerated growth compared to the initial plans. In real terms, the TME was expected to grow by 2.9 percent annually according to the spending review 2000 plans (GB Treasury 2010). Over the same period the growth turned out to be 5 percent. This explains the reason why the labor government delivered increased departmental spending than the anticipated amounts (Talbot & Baker 2009). The increases in the pension payments and lower tax credits for families without children resulted AME growth. Between 2005 and 2008, the spending review indicated that DELs would growth at roughly 5.5 percent (GB Treasury 2010). Under the labor government in the United Kingdom’s spending reviews, it is clear that spending out-turns have surpassed the original anticipations (OECD 2009). This has given an impression that, despite the comprehensive spending review in 2007, the labor government would end up disbursing additional funds to the major areas (Talbot & Baker 2009). This move is widely viewed as an attempt by the government achieves set targets e.g. reducing child poverty in the near future. However, there is a concern that such spending may not be sustainable unless spending is cut in other areas compared to expectations (UK Parliament 2012). At the same time, the receipts are expected to be stronger than the expectations. Further raises in tax could be a reality in order to sustain the large social welfare programs. The coalition government of the United Kingdom is committed to making capital affordable to the British small entrepreneurs. Through the central bank, the coalition government has been trying to reduce the lending rates to make loans accessible. The government of United Kingdom is trying to overcome recession by empowering SMEs and funding innovation (UK Parliament 2012). The government had been trying to reduce social welfare funds amid a growth national debt. There has been a real term increase in spending that has been accompanied by decline in the ration of spending to national income (Holley 2012). This has be a substantial cut by the government spending in the United Kingdom (Talbot & Baker 2009). The government has been under pressure to ensure quality services are delivered in the public sector (UK Parliament 2012). The government of United Kingdom has been trying to improve the wages to counter the quality of services offered by the private sector (OECD 2009). The government has been under pressure to offer competitive wages in comparison to the private sector. At the same time, poverty reduction in relation to income definition is vital for the government policies to empower the middle class (Allen 2012). However, a cut in a public spending component may result to a cut in the services provided. The announcement by the labor government during elections, of a reduction in public spending raised a few concerns. A 2 percent reduction in public spending would mean reducing the quality of public services in police, schools and hospitals. The coalition government in the United Kingdom had to deal with the deterioration relationship between the central bank and the market interest rates (Allen 2012). Occasionally, the central bank has had to intervene in order to offer economic solutions (IME 2012). Enforcing strict market rates by the central bank has had a direct impact in the availability of capital to the prospective entrepreneurs. The coalition government was forced to forsake conventional monetary policies although the policies had managed to achieve stability and low inflation (Allen 2012). The coalition government seems to be concerned with fiscal sustainability. According to financial experts, coming up with monetary policies that address the current financial crisis was not easy. The market was seen to develop by 0.1 percent in the initial part of 2012 (Holley 2012). The sluggish growth of the economy has caused the coalition government to be reluctant in clearing the deficit and national debt (Joyce & Mills 2012). The principal goal of the coalition government monetary policy was to get low inflation rates. In establishing the United Kingdom economic recovery, the government central bank had to work closely with the interbank market (Duthel 2011). The coalition government opted to empower the middle class as a way of fueling the economic expansion. The World Bank advised the United Kingdom to empower the society by using capital as opposed to entirely depending on stimulus program. In addition, building capital is considered as better way of enhance economic recovery compared to selling assets. The coalition government had to use quantitative easing (QE) (GB Treasury 2010). The coalition government has been keen to implement a robust fiscal consolidation with the goal of minimizing the risks on the budget. Credit acquisition has been eased through the measures taken by the government (Duthel 2011). Placing emphasis on the balance sheet of the bank has also contributed to recovery of the United Kingdom economy. Financial experts agree that one of the major challenges has been attempts to offset fiscal stringency (Joyce & Mills 2012). The coalition government in the United Kingdom has been warmed to remain alert on fiscal sustainability. It is evident that the government is keen on economic recovery and expansion of the economy. This is the reason the UK government is using multiple stakeholders to address the crisis in the monetary operations. The labor government seemed keener on increasing spending on welfare and public services (Holley 2012). This was clearly evidenced by the amounts allocated to education welfare per student in both private and private sector. The coalition government seems committed to long-term sustainability of the economic recovery path. This has cause the UK government to cut both welfare and public services spending. The labor government argued that the strategy was to ensure that the deficit never went beyond 3 per cent of the GDP. On the contrary, the coalition government spending review on the period between 2010 and 2015, aimed at ensuring zero deficit by the end of the parliamentary term. The labor government had made plans to the effect that the debt would not sour over 40 percent of the GDP. The government was seen to be taking a soft approach to the volatile economic situation in the United Kingdom (GB Treasury 2010). The labor government heavily invested in the public sector. This can be seen in the PESA report 2012. The labor government spent 73 billion pounds in the fiscal consolidation. This was followed by tax increases of 21 billion pounds under the labor government. The coalition government made 8 billion pounds tax increases (Collin 2012). In addition the government spent 40 billion pounds on fiscal consolidation. However, the overall cuts amounted to 32 billion pounds (GB Treasury 2010). The coalition government claims it has reduced the deficit by 25 percent as at now. In future the government of the United Kingdom is expected to invest in spending reviews. The government is expected to enforce measures to have zero-deficit. The growth of the United Kingdom economy has been considered anemic. Inflation has risen due to transitory value added tax. The financial experts in the United Kingdom believe that monetary policy can work better than fiscal policy when it comes to control of inflation. Currency fluctuations have had a profound effect on macroeconomic activity. External demand has impacted the UK economy significantly. The consumer confidence remains weak. The monetary policy makers in UK have been accused of being overly optimistic. The spending reviews are expected to continue to play a crucial role in the UK budgetary process in the foreseeable future. References Allen, K. 2012, April 5. UK economy grew 0.1% to avoid recession, says NIESR. The guardian, p. 5. Collins, M. 2012. Money and Banking in the UK (RLE: Banking & Finance: A History 1sted. Routledge. Corsetti, G., & Muller, G. 2009. Fiscal Stimulus with Spending Reversals , Issues 2009-2106 1st ed. International Monetary Fund. Duthel, H. 2011. European Debt Crisis 2011 1st ed. epublic. Floud, R., & Johnson, P. 2004. The Cambridge Economic History of Modern Britain , Volume 3, 1st ed. Cambridge University Press. GB Treasury 2010. Budget 2010: securing the recovery, economic and fiscal strategy report and financial statement and budget report 1st ed. The Stationery Office. Giudice, G., & Kuenzel, R. 2012. UK Economy: The Crisis in Perspective 1st ed. Routledge. Hills, J., & Stewart, K. 2009. Towards a More Equal Society?: Poverty, Inequality and Policy Since 1997, 1st ed. The Policy Press. Holley, D. 2012. UK Economic Recovery: The Long Road: A Political Thesis (1st ed.). Grosvenor House Publishing Limited. IME 2012. Profile of Recession and Recovery. Institute for Market Economics. Retrieved November 23, 2012, from http://http://ime.bg/en/articles/profile-of-recession-and-recovery/ Joyce, M., & Miles, D. 2012. Quantitative Easing and Unconventional Monetary Policy – an Introduction. The Economic Journal, 122 564 F271–F288. OECD 2009. OECD Economic Surveys: United Kingdom 2009 1st ed. OECD Publishing. Peshkov-chow, E. 2010. Spending Review 2010, 1st ed. The Stationery Office. Talbot, C., & Baker, M. 2009. The Alternative Comprehensive Spending Review, 1st ed. Manchester University Press. UK Parliament 2012. Economic and fiscal outlook March 2012 1st ed. The Stationery Office. Read More