Labour will examine every penny of public spending, Ed Balls promises

http://www.guardian.co.uk/politics/2012/sep/27/labour-public-spending-ed-balls

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An incoming Labour government will introduce a root and branch budget review to examine every penny of public spending, Ed Balls the shadow chancellor tells the Guardian.

The budget review, expected to report within a year after the next election should Labour find itself back in No 10, is designed to look at the purpose and value of all public spending against the backdrop of some of the toughest long term tax and spending challenges to face the postwar Labour party.

The move – under discussion within the Labour leadership for months – is designed to signal that the party understands the scale of the public spending challenge facing the country.

Balls said: "The public want to know that we are going to be ruthless and disciplined in how we go about public spending. For a Labour government in 2015, it is quite right, and the public I think would expect this, to have a proper zero-based spending review where we say we have to justify every penny and make sure we are spending in the right way."

He pointed out that Labour had not introduced such a radical examination in 1997, something he now regretted. A move to attempt such a department-by-department spending review by Tony Blair in 2005 was rejected by Gordon Brown's Treasury.

Balls said the review would be subject to three qualifications: first, Labour would make some commitments in its election manifesto on tax and spending – such as protecting the international aid budget – based on its key priorities of fairness and growth. Another candidate for a pre-election spending commitment might be health; second, the spending review "will examine whether cuts now would lead to higher costs in the future. For instance, if you cut public health or targeted youth support, and other preventative budgets, that would be completely perverse"; third, he said he hoped it might be possible to reach cross-party consensus before the election in specific areas, such as social care and children in care, so taking them out of the zero budgeting process.

He also disclosed that shadow chief secretary to the Treasury, Rachel Reeves, and the shadow Cabinet Office minister, Jon Trickett, were going to do some "deep work" on spending and efficiency, deploying a panel of experts to look at technology and efficiency.

Balls felt impelled to move in the face of evidence that borrowing is rising due to lower than expected growth and tax receipts, so putting more pressure on Labour to say how it would tackle the deficit after 2015. The move contains some political risk since opposition parties may feel freer to claim Balls is secretly planning to axe cherished spending items after the election, prompting Labour into ad hoc denials of opposition allegations.

Countering the charge, Balls said: "We will need to make decisions in our manifesto on our big strategy on taxation and spending, as well as our fiscal rules. As in past parliaments, that could mean we make overall commitments on some items of spending. For example there is a cross-party consensus on spending on international development. But that does not mean the Dfid [Department for International Development] budget is taken out of the zero budget review – you still need to know the money is being spent wisely. There has been a big rise in consultancies for instance."

But he hopes the electorate will be impressed that he wants to take an over-arching look at state spending in a period of austerity.

In traditional incremental budgeting, departments justify only changes compared with past years, based on the assumption that the "baseline" is automatically approved. By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only the changes.

Balls said: "With zero-based budgeting you can test spending not on the basis of whether it is easy to slash, but whether it meets your priorities. The reason the Tories ended up cutting spending that slashed growth and damaged women was because the only priority they had was to cut spending in the belief that it would boost higher private sector growth.

"We should try, in a way the coalition has failed, to face up to some of the big strategic questions in public spending".

He added: "This government has had no zero based budget review. They just came in and said 'let's go as fast as we can, and cut anything that is easy to cut.

"It allows you to look radically at public spending and test it against our objectives and priorities. It is something that governments have not done enough in the past. That does not mean that everything is up for grabs."

He thought the zero-based review could tap into "some genuine innovative thinking – how can we work in partnership with others, how can we use our leverage, how can we maximise our returns, how can we focus on growth as well as spending". He declined to say if Labour would match the specific spending totals that will be set in the coalition spending review next year and covering 2015-16.

He said: "We are not going to provide a budget or a spending review before we get into government. That does not rule out key areas being chosen as priorities."

He added: "If the deficit is bigger, or more challenging at the end of the parliament, you cannot have a debate simply about which tax rise or spending cuts you will use to sort that out. Growth is the third leg of that argument. And that is also priority now, we cannot just carry on as we are – the fiscal position is getting worse."