CONFIDENTIAL Cgg^> CONFIDENTIAL

---

CONFIDENTIAL

T

^

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

C

<34) 7

COPY NO

82

February 1984

CABINET

CAPITAL AND CURRENT EXPENDITURE

Memorandum by t h e C h i e f S e c r e t a r y ,

BAC

Treasury



KGROUND

On

1 0

November 1 ^-factor'

was i n v i t e d by t h e C a b i n e t " t o g i v e t h o u g h t t o how a t i o n on t h e s p l i t between c a p i t a l and c u r r e n t e a v a i l a b l e , and t o c i r c u l a t e p r o p o s a l s a t an

ri :~ urvey". I t was s u b s e q u e n t l y agreed on

/ Se of the I d have a paper "about t h e t r e n d over t i m e

in t h e T * ex !, i b u t i o n of e x p e n d i t u r e between c u r r e n t and c a p i t a l

_ P t i d i t u r e " f

yA2F£bru v t ^ p r u a r y d i s c u s s i o n o f t h e economic s i t u a t i o n and Prospect.

Si e

a

w

v

c o u l d

s f

s t a

1 2

y

t

h

a

t

C

a

b

l

d l S t r

e

p e n

o

r

2.

so r

b e e n

a U e g e d

P Oduc?n . ^ 8 an imbalance .bet

p

t l n

3.

T h ii s

^c s e c t o r c a p i t a l spending has d e c l i n e d ,

^ p i t a l and c u r r e n t e x p e n d i t u r e .

Paper c o n s i d e r s i n t u r n /

1.

The p r e s e n t a t i o n o f t h e f ' a ^ t ^ o n p u b l i c s e c t o r tending. Cgg^> n e

case f o r any p a r t i c u l a r l e Pital

c u r,r e n t* P n d m gS o r "r e l a t i v e p r o p o r t rrent expenditure.

*ESENT.

a

s

p ee n d i n

o

r

capital



of p u b l i c sector

ns o f c a p i t a l and

U r

P

ATION

s i v e P u b l i c E x p e n d i t u r e W h i t e Papers h ^ t e !" al, , j ^ n o f c a p i t a l w i t h i n t h e p u b l i c ex t a i l e d t a b l e 1.9 on t h i s same b a s i s w i l l < next

gur show ^ per. I t i s shown a t Anne U C C e s

h

o t

0

0

r

t

d e

S

W b

t e

P a

e s

CONFIDENTIAL

lown a d e c l i n e

^re p l a n n i n g

be i n c l u d e d

aggregate

CONFIDENTIAL

£ billion

1978-79

1979-80

1980-81

1981-82

1982-83

1983-8A

1984-85

E s t i m a t e d Plans

outturn

10.2

11.1

10.8

10.0

10.4

10.0

14.2

13.0

11.6

10.0

9.9

9.4

o c ,->,•; - v m ^ e r t h e p e r i o d 1978-79 t o, 1984-85 t h ic s »arge re eagt e suggests a f a l l 4£<&^40 p e n t i n cost terms. n

0

a e

/

0

o f

e r

C

6

­ "WpJWic

expenditure p l a n n i n g t o t a l , o f which these I P a r t % ^ > aggregate o f ^ d i v i d u a l c o n t r o l t o t a l s . « u r e ^T^cmomic ^ d social significance of public 8 ^ is a ^ t o p u b l i c sector spendmg ~ " £ ' £ £ c o n s t r u c t i o n i n d u s t r i e s . The C h a n c e l l o r o f t h e E x . °use on 24 November t h a t i t was hoped t o » ? £.£ £er

Presentation of t h j ^ a s p e c t i n t h e f o r t h c o m i n g

n

a

c

t

i

v

i

B e

^ ty, ^

8

g

u

i

d

e

r

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r

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t £

h

e

t h

e



e

p

«hol The b e t t e r

t h e public"

6

r f o r t h i s purpose i s gross spending by t h e

r on new c a p i t a l goods.

o f

T h e

Planning t J t

a.

res

u n d e r s t a t e t h i s i n t h r e e ways

F

i g u r es of

s a l e s ; t h i s does n o t

r m a t i o n a r e shown n e t o f a s s e t

r e new work.

b. By i n t e r n a t i o n a l c

i^in, v i r t u a l l y a l l defence

expenditure i s c l a s s i f i e

rent not c a p i t a l . This

obscures t h e r e a l n a t u r e 0*

defence s p e n d i n g , and

i t s impact on t h e equipment ^ J j / & n s t r u c t i o n i n d u s t r i e s .

" External financing l i m i t s V a p ^ r than c a p i t a l

some" ^ t h e na£i£*^>lised i n d u s t r i e s and

other public corporations.

e

3 r e

n

e a g u e s

} clud shown ason f « e

i s re

a

l n

10.

o r

now have seen t h a t new White Paper w i l l a l s o

1•13 on a more comprehensive b a s i s . The f u l l t a b l e

B; Annex C shows t h e a d j u s t m e n t s and d e t a i l s t h e

them.

E , n e W

I O r

w

s c o r e a

A

n

ill

t a b l e

n

e

x

The

summary s t a t i s t i c s on t h e new b a s i s show

1978-79

1979-80

1980-81

1981-82

1982-83



1984-85

Plans

SidT^I^L^nding on 1

' 9 8 ^

1

'

8

16.5

17.3

19.3

18.5

te

r m s 19,3

CONFIDENTIAL



CONFIDENTIAL

£ billion

1978-79

1979-80

1980-81

1981-82

1982-83

1983-84

1984-85

Estimated outturn

Plans

£jjP_ital Spending on Goods and S e r v i c e s ~ i t a i G r a n t s t o P r i v a t e Sector: 15.8

18.4

19.4

21.4

23.4

23.9

22.0

21.6

20.7

21 .4

22.2

21.7

11.

Xast w i t h t h e p l a n n i n g t o t a l p r e s e n t a t i o n i s s t r i k i n g ,

Aether 1

ng a t spending on goods and s e r v i c e s a l o n e , o r i n c l u d i n g

Pital '

J^s t o t h e p r i v a t e s e c t o r , t h e p i c t u r e i s o f v i r t u a l l y no cha the Whit" P ° t h e 1978-79 t o 1984-85 p e r i o d . I n p r e s e n t i n g

CriH„.! P we s hsahlall lbe oo demonstrat e et htahta tmuch

beable able t t demonstrat mucho f o ft ht eh e

i c i s o f t h e

of t h e c a p i t a l spending f i g u r e s had been m i s p l a c e d ,

C a

gr

n

S t

6

a

t e r m s

o v e r

e r

r i t

m

P 0 S I

TI0N F

IN

L

A

T

£

l

R

i g u r

i s i s a f t e r 1984-85 w i l l n o t be g i v e n i n t h e

problems. P a r t i c u l a r d i f f i c u l t i e s r e l a t e

to the . defence spending and t h e t r e a t m e n t o f

nd E n t - . T ~ ~ . tion . t i s h Telecom ( B T ) , B r i t i s h A i r w a y s (BA)

jgramme o f p r i v a t i s a t i o n w i l l u n d o u b t e d l y

--an t h t " ­ > • investment p e n a l i s e d i n d u % ^ i investment" - and hence p u b l i c s e c t o r

onwards fr ' ^ he t r e a t e d a «££a\£ing s i g n i f i c a n t l y f r o m 1984-85

rlier" ^ » p r i v a t i s a t i & ^ J i ^ a l r e a d y had some e f f e c t i n . t h e 300 c i i i ^ ! ^ e s t m e n t by co^&n^s a l r e a d y p r i v a t i s e d was some

can 978-79.) This i s C ^ d V l i b e r a t e a c t o f p o l i c y and one

<-&n r e a d i i

l i k e t o n o t e t h a t i f we

ssu that• ' collea

White p"

a P £ r

b e C a u s e

a

0



p r i v a t i s a

e

P

1 S e

0 i l ( E 0

a

W

1

<

e a

n d e e d

£

3 1 8

V e

n v

i

a

n

1

p r e s e n t

B

u

t

m e

i.

re

m a

i

t b e

n s

C a

a

P ^ t a l p r o p o r t i o n o f t o t a V ^ f e n c e spending

s i s planned f o r 1984-85 ( c * f e r t h i r d ) ;

c o n t i n u e at f-v, the t h r e e pp rn iv va ai ti is se ea d cc oo rr pp oo rr aa tt ii oo nn ss con

t o i n v e s t

e

same r a t e i n c o s t terms as i n 1984-8

^ e cost *

nd s e r v i f i g u r e s f o r public sector c

on t h e new p r e s e n t a t i o n show:

t h e n

a

c e r m s

p e n d i n g on goods

c

e s

1984-85

1985-86

Excluding BT, BA and EO after 1984-85

19.1

17.0

Adding back assumed investment by BT, BA and EO

19.1

19.0

CONFIDENTIAL

^ N ^ V . 1986-87

CONFIDENTIAL

13.

1985-RA b r o a d l y comparable b a s i s t h i s suggests ->-o6 and a a smal s m a lll f f a al ln i n iofif,_fi7

1986-87.

n S

V

L

E

V

E

L

0

F

little

change i n

CAPITAL SPENDING?

rrn

ne new p r e s e n t a t i o n shows t h a t t h e l e v e l o f p u b l i c s e c t o r

spending has been b r o a d l y m a i n t a i n e d . We cannot expect t h a t

ence our c r i t i c s ; t h e y w i l l c o n t i n u e t o argue t h a t we s h o u l d

roore s t i l l . T h i s p l e a i s always s e d u c t i v e and s t r i k e s a chord

s u p p o r t e r s . C e r t a i n l y no-one can deny t h a t c e r t a i n types o f

^ o j e c t s h o u l d be a h i g h p r i o r i t y f o r any Government. However

that- • J ^ t h a t we s h o u l d c o n t i n u e t o examine p r o j e c t s one by one and

^d be a g r e a t m i s t a k e t o s t a r t l o o k i n g f o r a

c o r r e c t - o r

ven

^JJJJJjP " l e l o f c a p i t a l e x p e n d i t u r e i n aggregate

e

a

15.

e v

<
I N

.

R

c n i n

i mind ^5 v g a balanced assessment o f t h i s q u e s t i o n we must bear

imp t h a t some types o f c u r r e n t e x p e n d i t u r e can be as

investm P lFor example, i n d u s t r i a l t r a i n i n g i s as much an

to i ^ „ ^ ! r i ^ £ 5 \ a n d m o r t a r . Most R&D i s c u r r e n t , b u t designed Prove l o n e ­ r o d u c t i v e c a p a c i t y . Much c u r r e n t e x p e n d i t u r e

l r s t

0 r t a n t

3 S

c a

n t a s

l t a

b

1In

°

n

and work f o r p r i v a t e i n d u s t r y , such as

rchases o f d r u g s. More work f o r t h e p r i v a t e

t o i n c r e a s e s i n p r o d u c t i v e c a p a c i t y and

industries.

the c a p i t a

16. That . n «uw sa a l r r e n t e x p e n d i t u r e s h o u l d be viewed

o t to t o say equally favourably. ^ ° t t h a t we f a i l t o h o l d back areas such

as local authority current 9* the c a p i t a l / c u r r e n t b a l a n c e i s

bound to be affected. Simiia e g r o w t h o f l a r g e c u r r e n t programmes

like social security holds do capital proportion within total public spending l s

. in whv

would w i s h t o see i n v e s t m e n t s more p r o p e r l y a m a t t e r f o r as d e f e n c e , can e f f e c t i v e l y s e t e l s e w h e r e , as i n h o u s i n g ,

i c sector investment t o

s h i f t towards p r i v a t e s e c t o r ovision. Similarly,

fre e t h ^ ^ l i s e d i n d u s t r i e s t o the p r i v a t e sector i s intended

cn^! . constra and t o ensure t h a t

u U y commerHaT " -m "ern" t f r o mW Government V « ™ K B I «. investment d e c i s i o n s ,

e d t oi f r a t i o n s w i l l apply t o f y as a whole; aggregat • » investment i n t h ub than t h a t i n t h e o r i n v e s t m e n t i s much c sector on a r e d i f f i c u l t ,

°n a Kr J P r e c i s e comparisons on the new p r e s sector equivalent basis, a f t e r deducting p Purch ^ s e s ^ o f ssome o C n c i l hous 2-83 " £29I "T""*;-nouses, p r i v a t e s e c t o r i n v e s t m e n t i n g on goods

ervi compared w i t h p u b l i c s e c t o r c a p i t a nts

P sentati °^ billion. (The c o n v e n t i o n a l n a t i o n a ively.)

g i v e s f i g u r e s o f £31 b i l l i o n and £ 1 2 b i l l i o n

M. Second, there are areas ^ by the public sector held bac the private sector. Some w cto be carried outp a tonly by the pubt e r o f p o l i c y c u t back p t ! have age we r a f »• * " C O U r

a

S

a

c

n S

1

e r r

t o

n a t

f u

l r

o n a

l n v e s t

A V

u

n e

u

i l u u l

c o n s i d e

3 n d

t h e r e f o r e

jJ H

P

r

i

V

a

t

e

a

t

s e c t

U t

a d l v

W a s as

C o u

1

m o

a n d

s

o

n

8

-

1

c

r e

S

£

1

7

0 n

18. D o t

T h

.



h by

demoer v!° ^ i P l i c sector investment a

Ples of ^ n ^ o r s and t h e r a t e o f economic g r o w t h .

"need" f o r c a p i t a l spending f a l l i n g ; such as

P P

arn

a P

P r

1 C

a t e

e v e l s

o f

u b

a c t

h e

CONFIDENTIAL

CONFIDENTIAL

of

e

, birth rate on the need for educational buildings, the s h i f t of

ff^ ! the health service from expansion of f a c i l i t i e s to more

lent use of the existing c a p i t a l stock, and the effect of lower

onomic growth in recent years on demand for energy and other

< ^ ^ r a s t r u c t u r e projects.

l s

e

l n

c

f

o u

r t h , c a p i t a l investment i s not an end in i t s e l f , but a means

end. in some policy areas, consideration must be given to

the end i s best served by c a p i t a l or current spending. For

is the aim of better education best served by improved

jraming or new school buildings? I s the aim of maintaining

the e v < ^ C ^ f ^ ° ^ infrastructure best served by maintenance of

ex^jt+i c a p i t a l stock or by new c a p i t a l works? In the public as

W> the p

aJ^ sector, i t i s e s s e n t i a l to consider the costs of

and in

oposals and compare them with expected returns; investment achieved

^levant ca. ; to compare the returns with what could

by non-capital spending.

a n d a r d

In

»• - the n a t i ^ i s e d industries the t e s t ^ u l d ^ e a r l y always be

Aether the p r o j O i l l earn a c o ^ e r c i a l r e t u r ^ t value on the

ervi

, where 5 & « f t e n not possible to put a ma benefits °«put, the costs h O L b e set against an evaluation \ maintaining or i W n * the s e r v - e to meet demonst &0s and 1970s produce^jS&vv proie­ proj ects

commercial r i s k s wer usly underestimated and the actual

returns achieved were inade In general, the nationalised i n d u s t r i e s '

returns on c a p i t a l since t exampl-iy 1970s have been very poor; p a r t i c u l a r

B r i t i s h Steel Corporation

ttoderiis e I s l e o i on. S i m i l a r l y , Concorde i s by no

means the tr^ investment by central and -local

g o v efnment, rn!.°

P l e of unec s

M r k e

c e s

T h e

19

o r

l n c l u d e

t h

x

U

a n d

n l y

r a i l

e l e c

e x a m

21.

The starting point for assess* ture c a p i t a l spending plans

be th

dance with the normal

eli J appraisals ejyel turns on the return

hich part' r a t i o n of the cor.. achieve. The i n i t i a t i v e

alte J t s can be expect o t a l s between between c ca ap pi it ta a l and

curren e ^ ? balance withi progra r r e ntt

e w i t h i nn programme\Ntotals • rtment ''" r e s t w i t h spending M i n i s t e r s and t h e i r r vdj . - . Under t h e p r e s e n t arrangements f o r c o n t r o l l i n g p u b l i c * Pn ep n -iture i t :s to a l t e r the

r ii b 1 P ° i b l e f o r T r e a s u r y M i n i !

s a t i s f a c t o r y

t e• N a t^i v e

s i g n i f i c a n t l y , nor i s i t l i k e l y f ' do so. arrangements could be devised which Enable them to

m u s t

e u i d

h

p

r

o

e

c

t

n e

w

C o n s i d e

f o r

1 C U l a r

p r o

e c

r

8

t l

e

a i a n c

e

P a

P e n d

t U r e

m u s t

s >

e

V

e

n o t

ss

a

a l

n c e

r T l a

C O N c

Lusio

22.

N S

C ^ V

,^

T h £

e a

2

t a b

a

& P a p e r

^ r ' s Whit* " l e of public c a p i t a l spending to be inclut

" s been h r (demonstrate that this type of exp£*

oadly constant in cost terms over recent years.

23.

w i l 1

,

T H E R E

>­

l

n

W a y

o f

de

right pr po * ° termining in aggregate what are thi

of p ° b v ° r e n t and c a p i t a l expenditure within a °nsidp.L P i n g . The case for capital expenditure

d project by project,

0

v ° 5

t

a

0 n S

l

c

C

s

f

c u r

e n d

e r e

CONFIDENTIAL

31

CONFIDENTIAL

a

At t h e end o f t h e day t h e balance between c u r r e n t "

"Pending s t depend p r i m a r i l y on c o l l e a g u e s ' ^ d g r o e n t o f t h e p r i o r t i e s

" h i n t h e i r own programmes. B u t i t w i l l be e v i d e n t * ' J ^ " * accommodating c o s t - e f f e c t i v e p r o j e c t s w i t h i n t h e p l a n n i n g t o t a l s *

V e agreed w i l l depend on our a b i l i t y t o w i t h s t a n d p r e s s u r e f o r i n c r e a s e d

S^rent expenditure.

m U

t h

w

w

P R

T r e a

s u r y Chambers

3

F

e b r u a r y 1

9

8 A

CONFIDENTIAL

ANNE X

tO

A

TAL

BY ECONOMIC CATEGORY

£ million cash

•xpendrture

1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-B7

t*S« and saiaries

current expenditure on goods arid . »*tMice S

u

•»*n\ grants the private sector T'*^ Srants \oabroad *uthomv expenditure not ^J^Wed to current programmes

Masti c Vio< xedstocks capita* formation in vaiut grants C,^« S to n.-.­

U„

-Jme

o

•

20.948

24.840

30.841

34.245

36.276

38.468

39.120

40.650

41.880

11.501 4.004 18,542 1.618

14.012 4.939 22.115 1.819

16.652 6,102 27,053 1,306

19,357 6,027 32.846 1,289

22.376 6.060 37.316 1,784

24.623 6,128 40,286 1.812

26,026 5,423 42,408 1.779

27550 5.O60 44580 2,050

28.820 4.710 47,100 2.140

735

450

220

56.614

67.725

81,955

5.244 57 1.810 240

6,019 -14 1,869 658

6.238 84 2204 921

5,166 7 2.338 1,356

5,428 353 2.954 732

5.933 381 3.299 -62

5.285 447 3.032 980

6.100 270 3.100 500

6.390

270

3.130

410

1.075 267

2,464 -319

2.770 -521

1,943 -270

1.593 -97

901 47

892 192

150 150

-370 140

371

151

4

93.764 103.812 111,316 115,491 120.640 124.880

-1

3

»om . other

442

-481

-623

294

-1,281

-239

-819

-600

-920

9.138

10.196

11,073

10,833

10,053

10,412

10,012

9.680

9,050

-999

-356

79

-488

-1,200 -1,900 100 2,750 -300

-2000 3.750

-2,000

4.750

65,752

76.922

92,672 104.676 113.377 120.328 126,353 132080 136,680

7

33

ANNEX B

Pile

B:KEITH06

23/01/84

1-13

# million

1978-79 outturn

1 1 1 9 7 9 - 8 0 1 I o u t t u r n t !

««ml eranment and Ust li t public *Mporgeo tiovn l*ptn41ture on dwellings than plant dwelling" constructionsofother f«tn»,e, vehicles, ana •achinery

21011

25561

1

1982-83

1 9 8 0 - 8 1 I 1 9 8 1 - 8 2 I

u t t u r n ! o

utturn o u t t u r n ! o

1



!

!

1

!

I

1

1

1

!

!

2395!

3165!

2302!

37661

•

n

e

t

o

u

c

•ervi (b

«s

e

i

e B e a

>

l

) 1) 1) !)

n

P l a n t and

2212!

43021

1

1

11401

1

1

1

!

2227!

4524!

3951 38001 1 ! • i ! I 3! 2694! i i 4240!

456!

4554!

1

1

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i

1

1

51

2930!

1

i

47431

528!

52001

1 4734! 1 1

11845

142071

16450!

17352

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203421

21099

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197601

19275!

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187321

193731

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19431

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1

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* <»»lis*d industries and other »** 11 public corporations tOO")H a t I *New *P«ndUruere o-on, dwellings

construction f«ch»»es f *achi„ e ) ^an dwells,. " i nerv ' of v e h i i , R «

1 I

1 1 1

t

1

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736!

I

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!

1

6291

°«tnct expenditure Construction

1 1 I 1 9 8 3 - 8 4 ! 1 9 8 4 - 8 5 (estimated 1 plans 1 outturn !

9021

2711

34451

2!

2489!

4388!

11321

3!

2838!

4647!

c

year

• Slants to private sector ntral goveBrnment and Ust 111 public >«ratlon

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19361

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19481

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21787

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192

J°intr„! fencI / ? P °llc c o r p o r a t i o n s I n P a r t 5 o f Volume 2

7


thevV"' nationalri P °iture.

^ s '«t» , * av.,1 < l e the i - » t r l e « " f i g u r e s need t o be n o t e d : - ( a ) t h e y a r e n o t i n c l u d e d i n t h e p l a n n i n g

T e l e c o m a n d B r i t i s h A i r w a y s b u t n o

> I «bl ^ i9 .8 .| ,. « * P t a l spending i n 1984-85 o f B r i t i s h — f o r *n? t P f i s e O i l , ( ) B r i t i s h T e l e c o m c h a n g e d t h e a c c o u n t i n g t r e a t m e n t o f c e r t a i n f i x e d

nt e etxepxepnednidtiutruer e o no nl alnadn d and ande x ei xs it si t

h « » „ «>ncin..! 8 " r e i n c l u d e se sn e ng buildings

t h c a p i t a l e x p e n d i t u r e i n T a b l e 1.9

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6

t a

w

p r e

ble

sets o u tthe adjustment

sentation of capital

a >

figures

expenditure.

o f gross

domestic

shown i n t h e . n a t i o n a l in measuring

These

fixed

accounts

t o deduct

the ownership

are:

capital

formation are

n e to f assets

new w o r k p l a c e d w i t h

appropriate

sectors.

i n moving from the o l d t o t h e

( o r add)

industry

sums w h i c h

excludes

But

i t i s not

merely

o f assets between the p u b l i c

Hence, t h e a d j u s t m e n t

sales.

transfer

and p r i v a t e

the purchase and

sales o f l a n d and e x i s t i n g b u i l d i n g s .

C o u n c i l house

i s by f a r t h e l a r g e s t

has r i s e n

£

500 m i l l i o n

b

y

component, which

i n 1978-79 t o o v e r



£2000 m i l l i o n

sales

from

under

a y e a r now.

b.

international

ture

convention, virtually

i sc l a s s i f i e d

as c u r r e n t

i n c l u d e s t h e NATO d e f i n i t i o n

a l l defence

notcapital. o f defence

definition ammunition)

of capital

covers

c

(excluding

I t gives a groad

expenditure o f a capital

expenditure

T h e NATO

and c o n s t r u c t i o n , b u t excludes

repair and maintenance. o f

equipment

The a d j u s t m e n t

capital

rather than the conventional d e f i n i t i o n .

e x p e n d i ­

nature rather



spares and

indication



than operating

°sts, a l t h o u g h t h e method o f c o m p i l a t i o n i s n e c e s s a r i l y

approximate.

external financing a r >

e scored w i t h i n

limits

rather

the planning total

industries

a n d some o t h e r p u b l i c

a d

3ustment

substitutes

e x

P e n d i t u r e , which

V e

ar

than capital

their

a n d h a s shown l i t t l e

f o r nationalised

corporations.

aggregate

i sc u r r e n t l y

expenditure

around

capital

The

£7 b i l l i o n

change i n r e a l

terms

u.

adjustment omits n e tlending

from the

a



since

1 9 7 8 - 7 9 .

t h e



total.