Public Expenditure - UK - August 2016
“The referendum decision to exit the EU will change the emphasis of the government, not least because the new chancellor and the prime minister have been somewhat critical of previous budget cuts and austerity. These policies are due to be scaled back in the autumn budget. There is unlikely to be a radical departure, though the chancellor will be mindful of the need to boost industry amid the uncertainty created by the exit decision.”
– Terry Leggett, Senior Analyst
This report answers the following key questions:
- What is the likely impact of Brexit on public expenditure?
- What are the main drivers of public spending?
- Is capital spending in the public sector outstripping overall growth?
Political policy is inevitably the single most important factor influencing public expenditure. The two major parties that compete for government generally have different approaches. Labour tends to support public spending and is more prepared to borrow to that effect, while the Conservatives follow a stronger fiscal control policy. However, this is a major over-simplification, with the change of chancellor post-EU referendum expected to lead to policy changes, even though the Conservatives remains in government.
The fiscal policy of any government is ultimately determined by the country’s economic conditions. The difficulties that surrounded the financial crisis in 2008 led to a very tight fiscal policy by the Conservative-led government. The UK subsequently recovered, albeit slowly, and the economy was recently recording among the strongest growth in Europe. However, the decision to exit the EU has created a high level of uncertainty. Forecasters are suggesting anything from slowing growth to a recession in the short term. What is clear is that it has created economic uncertainty, which is likely to feature heavily in the autumn statement when the new chancellor announces his plans.
Social conditions also determine public expenditure policy. The UK population continues to grow, with strong changes in the make-up of that population. A particularly significant trend is the ageing of the population as the older elements of society grow in proportional terms to the total. This reflects historic birth rates, huge advances in healthcare allowing people to live longer, healthier lifestyles, and the comparative affluence of the population. The trend is expected to have a significant impact on pensions and healthcare, while the number of children being born will provide guidelines for further demand on the educational system.
There is effectively no public sector supply industry as no company offers the entire range of services and products used by the public sector. Many companies have significant interests in the public sector, but are typically defined by a separate industry definition that is then used for both public and private sector supply, such as facilities management, waste management, aerospace etc. Even with a relaxation of public spending cuts, there will continue to be an intensifying drive to efficiency across the public sector, with the new government looking to emphasise productivity in its policies.
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