|A sensitive economy- (29.07.02)|
One of the ways of assessing the public finances in Britain at the moment is to look at how far the spending is sensitive to economic and political factors.
The main economic factors are economic growth and average earnings (rather than inflation on its own). Economic growth matters as Gordon Brown's record on delivering money for services as been based on deliberately underestimating the tax receipts that a particular rate of growth will bring in. This at face value would appear to have changed with his latest public spending forecast. However the future increases in National Insurance at the last budget reduces the risk of being less prudent and therefore tax receipts are still likely to have been underestimates, a point missed by many commentators.
The second economic risk is a higher rate of average earnings increase than growth. This will swallow up above inflation funding settlements in the public sector and also will increase the political sensitivity. Higher earnings increases, on top of headline grabbing announcements of extra money, can only encourage public sector trade unions to hold out for a large share of funding increases.
The economic effect of this on inflation may lead to higher interest rates that slows down economic growth, hitting tax receipts. That is why increasing NI was a smart increase in taxes in this situation, it is quite regressive and hits the low paid relatively hard, compared to general income tax at least. This helps, but controlling the political sensitivity of extra public sector money may be beyond the chancellor's scope.