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THIS DOCUMENT I S THE PROPERTY OF HER BRITANNIC MAJESTY'S GOVERNMENT

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J u l y 1983

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CABINET PUBLIC EXPENDITURE I N 1983-84

Memorandum b y t h e C h a n c e l l o r o f t h e Exchequer

I have t o J T ^ ^ f t t h a t o v e r a l l p u b l i c e x p e n d i t u r e t h i s year i s r u n n i n g sub­

s t a n t i a l l y ahead o f t h e f i g u r e s agreed by Cabinet and p u b l i s h e d i n t h e

February White Paper (Cmnd 8789) .

T h i s i s rej^^^ed i n v e r y h i g h r a t e s of p u b l i c b o r r o w i n g . The monthly f i g u r e s f o r c e n ^ ^ l T k y e r n m e n t b o r r o w i n g have caused concern i n the m a r k e t s , and t h e q u a r t e r l y f i g u r e s t o be p u b l i s h e d t h i s month are l i k e l y t o i n c r e a s e The f i r s t quar««Ki|entral Government b o r r o w i n g r e q u i r e m e n t f i g u r e , due °n 11 J u l y , i s l i k e l ^ ^ l ^ m e some £5 ,400 m i l l i o n , which i s £2,000 m i l l i o n more than t h e comparable f ^ u r ^ l a s t y e a r , and v e r y n e a r l y h a l f t h e f i g u r e envisaged at Budget t i m e f o r t h e year as a whole. I f i t were thought t h a t we were w i l l i n g t o see e x p e n d i t u r e and b o r r o w i n g on t h i s scale c o n t i n u e unchecked, i n t e r e s t r a t e s would r i s e , damaging t h e p r i v a t e s e c t o r and t h e p r o s p e c t s f o r j o b s and r e c o v e r y . x t

3We must n o t a l l o w t h i s t o t w f n , We need t o do what we can t o step up

the d i s p o s a l s programme; and t h i s i s a l r e a d y i n hand. But t h a t alone w i l l

o t be s u f f i c i e n t . We a l s o need t o t a c k l e t h e spending surge a t source, and

b r i n g t h i s year's e x p e n d i t u r e t o t a T % ^ M ^ t o t h e Cmnd 8789 p a t h .

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^• The surge i n e x p e n d i t u r e w h i c h b e % k i ^ j k t e i n 1982-83 has c o n t i n u e d unabated. Demand-related programmes - p a r t i c u l a r l y a g r i c u l t u r a l support and s o c i a l s e c u r i t y b e n e f i t s - are growing very r a p i d l y . Local a u t h o r i t y c u r r e n t p e n d i t u r e and n a t i o n a l i s e d i n d u s t r y b o r r o w i n g are a l s o l i k e l y t o be h i g h e r than envisaged. I n t h e l i g h t o f t h e 1982-83%ouAirn, we now expect o n l y h a l f e £1,200 m i l l i o n s h o r t f a l l i n c a s h - l i m i t e d ( ^ ^ S f e i t u r e assumed i n t h e White Paper. Of t h e £600 m i l l i o n e x t r a e x p e n d i t u r e now e x p e c t e d , about £300 m i l l i o n I s on defence v o t e s , and t h e r e s t spread across t h e f i e l d .

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^* I emphasise t h a t I am n o t a s k i n g f o r c u t s i n t h e p u b l i s h e d e x p e n d i t u r e

• t o t a l t h i s y e a r : b u t I am sure t h a t we must g e t back l°tf|t t o the White Paper t o t a l . To d e f e r a c t i o n c o u l d w e l l mean h a v i n g t o do much more b e f o r e the autumn, g i v e n t h e l i k e l y market r e a c t i o n t o t h e b o r r o w i n g f i g u r e s . And n any case i t makes sense t o c o n s i d e r t h e problem i m m e d i ^ S f c ^ ^ n o r d e r t o g i v e t h e maximum amount o f time i n which t o make t h e necess^^ry^mljustments.

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6The f i r s t and most obvious s t e p i s t o t r y t o curb t h e i n o ^ ^ M p on n o n ­ a s h - l i i t e d demand-determined e x p e n d i t u r e . I s h o u l d be g r a t e f u l i f those

c o l l e a g u e s concerned would e x p l o r e a l l a p p r o p r i a t e a v a i l a b l e o p t i o n s .

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R e a l i s t i c a l l y , however, we cannot expect t o achieve a g r e a t d e a d ^ y ^ t h a t r o u t e . To g e t back on course we s h a l l have t o t a k e a c t i o n on cash l i m i t s . 7

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®* ^ b e l i e v e t h a t t h e r e i s i n f a c t some room f o r such a c t i o n , p a r t i c u l a r l y on the non-pay s i d e , because p r i c e s t h i s year are i n g e n e r a l r i s i n g more s l o w l y t h a n was expected when Departments drew up t h e i r p l a n s . Nor can we exempt t h e pay s i d e , though we need t o t a k e account o f the p r e s s u r e r e s u l t i n g f r o m our d e c i s i o n e a r l i e r i n t h e year t o f i n a n c e the n o n - i n d u s t r i a l C i v i l S e r v i c e pay i n c r e a s e f r o m the o r i g i n a l p r o v i s i o n . I t h e r e f o r e propose a r e d u c t i o n o f 1 per cent on the "pay" element and

of 2 per cent on the non-pay element o f a l l c e n t r a l Government cash l i m i t s .

^ p e ^ J p a y " element would i n c l u d e g e n e r a l a d m i n i s t r a t i v e e x p e n d i t u r e . I PJJ^-^e e x c l u d i n g Rate Support G r a n t , because i t i s v e r y d o u b t f u l whether c\Ws would a c t u a l l y l e a d l o c a l a u t h o r i t i e s t o reduce t h e i r c u r r e n t expen­ d i t u r e , and l o c a l a u t h o r i t y c a p i t a l e x p e n d i t u r e . 10. i t would n o t be r i g h t t o exempt the n a t i o n a l i s e d i n d u s t r y E x t e r n a l

F i n a n c i n g L y p i t s (EFLs). For those i n d u s t r i e s c u r r e n t l y f o r e c a s t i n g an o v e r ­

run i n t h e i r EFLs, r e m e d i a l a c t i o n must be t a k e n t o ensure t h a t t h e i r

r e q u i r e m e n t s are k e p t t o t h e minimum. I n a d d i t i o n I propose f o r the i n d u s t r i e s I

o v e r a l l a 2 i W U f c n t c u t i n the p r o v i s i o n f o r t o t a l EFLs, t o be a l l o c a t e d i n

proportion t o ^ u ^ l ^ e r .

*!• I f Cabinet agrees, the T r e a s u r y w i l l agree w i t h Departments a d e t a i l e d

l i s t of t h e cash n m B ^ f f e c t e d . The s a v i n g s would be i n t h e range

£650-700 m i l l i o n grTO^Wfcr around £500 m i l l i o n n e t of some f u r t h e r r e d u c t i o n

in s h o r t f a l l . V > \

12. At the same t i m e , MM t o d i s c o u r a g e a r e p e t i t i o n of l a s t y e a r ' s end-year r g e , I a l s o propose t o i n t r o d u c e a scheme of end-year f l e x i b i l i t y . This

would p e r m i t t h e c a r r y - o v e r o f underspends on c a p i t a l i t e m s o f up t o 5 per

c e n t o f t h e o r i g i n a l p r o v i s i o n , as d e s c r i b e d i n p a r a g r a p h 19 o f t h e n o t e

a t t a c h e d t o C(82) 29. ( I n d i v i d u a j ^ t o c a l a u t h o r i t i e s a l r e a d y have a measure

°f end-year f l e x i b i l i t y , and I t s U t h e r e f o r e propose t o i n c l u d e them.)

There would be c o n s i d e r a b l e m a n a g e r i a l advantage i n such a scheme, and

spending Departments have been p r e a ^ ^ j ^ f or i t . I t would mean t h a t spend in;'

i t h i s f i n a n c i a l year would be reduced, by perhaps a f u r t h e r £100 m i l l i o n '

(though p r e s s u r e n e x t year would o f c o K s e ^ t e i n c r e a s e d ) .

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13. The p r e s e n t problem a r i s e s i n p a r t D a H ^ i t has proved so d i f f i c u l t t o

P r o v i d e r e l i a b l e f o r e c a s t s of r a t e s of spending. T h i s i s a p r o b l e m t h r o u g h ­

out t h e y e a r , b u t i s e s p e c i a l l y acute t o w a r ^ ^ t ^ k y e a r - e n d , as Departments

seek t o spend up t o t h e i r cash l i m i t s . There J ^ ^ ^ a l s o been severe problems

over f o r e c a s t i n g demand-related e x p e n d i t u r e . t h e r e f o r e seek t h e co­

o p e r a t i o n o f spending M i n i s t e r s i n i m p r o v i n g t h e f i n a n c i a l i n f o r m a t i o n f l o w s

f r o m t h e i r Departments t o t h e Treasury d u r i n g and p a r t i c u l a r l y a t the end of

e f i n a n c i a l y e a r . D e t a i l e d p r o p o s a l s w i l l be made a t o f f i c i a l l e v e l s h o r t l y I

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14I r e a l i s e t h a t the p r o p o s a l s i n paragraphs 9-11 aAeMe^will cause some

difficulty. But t h e s i t u a t i o n we f a c e i s v e r y s e r i o u s ^ i ^ J ^ ^ i e a c t i o n

Proposed i s the minimum r e q u i r e d t o h o l d t o our Budget s t r a t e g y t o con­

s o l i d a t e t h e r e c o v e r y and so improve j o b p r o s p e c t s . And w l ^ p l ^ a c t now.

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To sum up, i n o r d e r t o get c l o s e r t o t h e agreed p u b l i c e x p e n d i t u r e t o t a l , '

Propose:­ a. C o n s i d e r a t i o n by t h e Departments concerned o f p o s s i b l e i f c j f e ^ ^

s l o w i n g the i n c r e a s e i n demand-determined n o n - c a s h - l i m i t e d s p e n d i p g .



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b. A r e d u c t i o n o f 2 per cent i n t h e non-pay element o f c e n t r a l Government cash l i m i t s - t o y i e l d around £350 m i l l i o n i n 1983-84.

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A r e d u c t i o n o f 1 per c e n t i n t h e pay (and g e n e r a l a d m i n i s t r a t i v e

e x p e n d i t u r e ) e l e m e n t s , y i e l d i n g perhaps £100 m i l l i o n n e t .

d. A r e d u c t i o n o f 2 per cent i n n a t i o n a l i s e d i n d u s t r y EFLs, a l l o c a t e d

in proportion to turnover.

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V Y The i n t r o d u c t i o n o f a scheme o f end-year f l e x i b i l i t y on c e n t r a l ^ r ^ S o v e r n m e n t c a p i t a l e x p e n d i t u r e a t t h e end o f 1983-84, which s h o u l d t a k e the s a v i n g t h i s year t o around £600 m i l l i o n . f. That a l l spending M i n i s t e r s s h o u l d co-operate i n i m p r o v i n g i n f o r ­

m a t i o n f l o w s t o t h e T r e a s u r y about t h e course o f e x p e n d i t u r e d u r i n g t h e

year.^J^ !.,

Treasury ^

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July 1983

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