60. The new Government has presented itself as an agent of change. Its initial policy decisions do represent a real change from the previous Government. Alistair Darling's brave statements on taxation are a positive change, since they give greater prominence to the idea of competitiveness. But for the spending departments, the change is negative and represents a reversal of reform.
61. The themes of the new Government's public sector policies can be described as:
■ an inputs-led approach. Ministers have praised increases in public sector spending and costs for their own sake.44 Their key attack on the Opposition has been over putative reductions in spending.
■ central intervention. Ministers have pledged to intervene in detail, from the maths curriculum in schools to the buildings of the London NHS to the numbers of houses in different regions. This is at odds with the Prime Minister's rhetoric of a decentralised, "people first" policy approach.
■ the producer interest. The NHS review, for example, gives much greater prominence to the views of health service staff than to patients.
62. The new Government has already made specific spending commitments of over £4 billion, covering affordable housing, university maintenance grants and schools. The retreat from reform will put further upwards pressure on public spending and taxation. The overall effect will counteract the reductions in the basic rate of income tax in the last Budget.45
63. The initial decisions will have damaging consequences. They will impose an upwards pressure on public sector costs just as the public spending envelope is about to narrow. The UK has already seen the largest rise in public spending in Europe over the last decade with hugely disappointing results in terms of public service outcomes.46
64. The Government has indicated that these extra costs will be funded by efficiency savings. But the recent record on efficiency savings is very weak. However, judging by the experience of previous efficiency drives, it is unwise for the Government to fund new spending commitments through the promise of efficiency savings. A National Audit Office report recently claimed that of the £13.3 billion in efficiency savings claimed by the Government in September 2006, only £3.5 billion "fairly" represents efficiencies made, whilst a further £3.1 billion of the claimed savings "may be substantially incorrect".47
65. As a result, the new spending commitments will almost certainly be funded by an increase in taxation. This will frustrate the Treasury's welcome goal of a competitive economy and increase the pressure on vulnerable groups, in particular young people (the "IPOD generation" - insecure, pressurized, over-taxed and debt-ridden).
66. The Government's goal of a competitive economy is clear and transparent. What has been concealed is a certain future of a significant increase in state activity and in the tax burden. The Comprehensive Spending Review offers a chance for the Government to reassess its initial decisions, and for the Opposition parties to reassess their positions.
67. The Comprehensive Spending review is vital for number of reasons. Firstly, there are many indications that the option of further rapid rise in public spending is now closed. As well as an incipient taxpayers revolt there are also limits from the fiscal rules. Spending cannot go on rising rapidly without breaking both the fiscal rules. It would also be prudent to anticipate a contingency in which the UK growth rate may be rather slower over the next ten years. The UK already has a level of public spending and a financing mix which would cause grave difficulties if there were to be a recession. A significant fall in tax revenues would bring about an immediate and severe financing crisis.
68. In addition there is growing awareness of the problems facing the younger generations. They face the heaviest tax burdens as well as now having to save for their own retirement and to pay off student loans. The UK has yet to face up to a situation where a declining number of younger tax payers are paying benefits for a large number of baby boomers - benefits which they cannot expect for themselves. There is a strong case for moving towards a lower tax economy in which individuals have more freedom to invest in themselves.
69. The goal of the Spending Review must surely be to develop a policy response to these longer term problems. Its priorities should be public service reform - based on choice, competition and prices rather than administrative savings through "efficiency" - and targeted tax reform and reductions.
70. The key policy challenges for the next decade are to reduce the tax burden, in order to meet the challenges of global competition and an ageing population; and to achieve high quality education and training, to enable all citizens to gain from the opportunities of advancing technology. The new Government's first decisions take the UK in the wrong direction.
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44 For example, Balls, E. (2007), Hansard, 10 July, col. 1319. "There is new investment, with 35,000 more teachers, 172,000 new classroom assistants, more than 1,100 new schools and more than 1,300 Sure Start children's centres." Or Brown, G. (2007), Hansard, 11 July, col. 1439. "It means more money for the National Health Service this year, next year and the year after-money that the Opposition will not match. It means a proposal for 150 new polyclinics."
45 HM Treasury (2007), Budget 2007.
46 Emmerson, C. & Frayne, C. (2005), Public spending - election briefing, IFS. Of the OECD countries, only South Korea saw a greater increase in public spending as a percentage of national income between 1997 and 2005.
47 National Audit Office (2007), The efficiency programme: a second review of progress.