Recession puts extra pressure on budgets

A PUBLIC SECTOR borrowing requirement next year of pounds 44bn on the Government's figures - pounds 50bn according to City estimates - demographic pressures, manifesto commitments and the growth of demand-led spending, particularly in social security, lie behind the Government's review, writes Nicholas Timmins.

The Government's spending plans assume real-term growth in public spending over the next three years of only 0.75 to 1 per cent. But within individual programmes there are items growing way ahead of that.

Treasury ministers thus calculate that if the spending targets are to be held, public spending as a proportion of national income is to fall, and manifesto commitments - which range from an expansion of student numbers to real-terms increases in NHS spending - are to be honoured, something will have to give.

In health, the drugs budget is rising in real terms at 8 per cent a year. In social security, expenditure on some items has ballooned. Last year, the department spent pounds 2.5bn in income support on supporting 265,000 people in private residential and nursing homes, against pounds 10m in 1979.

The recession has made other payments soar. Mortgage interest tax relief for those on income support, once a tiny part of the safety net, cost pounds 949m in 1991.

Aside from direct unemployment benefits, there have also been mounting costs in benefits that in part have allowed early retirement for the less healthy who in times of fuller employment might have worked on. Invalidity benefit has mushroomed from fewer than 900,000 claimants in the mid-1980s to 1.4 million last year at a cost of pounds 5.25bn.

One Treasury minister said: 'When you are trying to keep the total increase in spending to 0.75 to 1 per cent in real terms, you can't have too many programmes running at 4, 5 or 8 per cent increases without deciding you have to curb them or drop something else.'

Spending also remains under pressure from the rising numbers of elderly. The increase in the numbers over retirement age will slow dramatically over the next decade, before accelerating again. But the numbers of 'old old' - those over 85 - will continue to increase significantly.