With all the talk not on 'if' there will be public spending cuts, but 'where' - what are the choices and pressures facing this Government, and whichever Government picks up the reigns following the next election?
At the very top level, total government receipts this year are expected to be circa £498bn - £48bn (8.8%) down on last year.
Receipts from income tax are forecast to reduce by £16bn in the current year (from £157bn to £141bn) – we are already seeing this within the construction sector as evidenced by the pay freezes and job cuts that we have read about in Building over the past few weeks and months.
This week there was an announcement that the number of unemployed rose by 281,000 in the three months to May – the largest rise since records began - and the CBI predicts that unemployment will not peak until the second quarter of 2010, at over 3 million. There is the double whammy effect to consider.
As unemployment rises, the cost of social protection is forecast to increase by £16bn over the same period, the net impact in the year being £32bn.
The impact on revenue from business is almost as stark. Corporation tax receipts are forecast to be down 22% (£10bn less than last year) and VAT receipts similarly down 23% (£19bn less than last year).
This problem started with the banking sector, but has now spread to the rest of the economy. Only when confidence and liquidity returns will the situation start to improve.
The final sting in the tail is revenue from stamp duty – forecast to be down by £6bn to £67bn. This may turn out to be an optimistic estimate unless the measures taken to date really start to stimulate the market.
These are big numbers, and put the budgeted £2bn increase in transport, £5bn increase in education and £8bn increase in health spending into perspective – the majority of the increase in health and education being salaries, not capital…
So can public sector capital projects really stimulate the economy? Well, if we accept that construction activity equates to circa 9% of GDP, and a third of that is in Public, the answer is yes.
Whilst there may be some political gesturing around commitment to capital schemes it would appear that the real pressure should not be so much on capital – the really big numbers are in revenue – and it is in the area of operational expenditure that the focus is most likely to fall.
Graham Kean is the head of public sector at consultant EC Harris