Are government spending and taxes too high (or too low)?
Flemming, John ; Oppenheimer, Peter
The Review is pleased to give hospitality to CLARE group articles,
but is not necessarily in agreement with the views expressed;
responsibility for these rests with the authors. Members of the CLARE
Group are M.J. Artis, A.J.C. Britton, W.A. Brown, W.J. Carlin, J.S.
Flemming, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D.K. Miles, M.H.
Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent,
M.FG. Scott, Z.A. Silberston, J.H.B. Tew, S. Wadhwani and M. Weale.
Targets and Accounting Concepts.
The UK Conservative government in the 1990s declared a central
medium-term objective of its economic policy to be a reduction in the
ratio of public (government sector) expenditure to GDP to below 40 per
cent. Projections accompanying the 1996-97 Budget envisaged this target
being achieved in 1997-98.
The target was expressed in terms of GGE(X), an aggregate which
combines central and local government spending, but excludes items
financed out of the proceeds of the National Lottery through the charity
and heritage boards, and calculates government outlays for payment of
national debt interest on a net basis, i.e. subtracting the
government's receipts of interest and dividends. Whatever the
justification for these adjustments in terms of accounting principles,
they have the effect of making the proclaimed constraint on public
expenditure (slightly) less severe than it otherwise would be.
On the other hand, GGE(X) also excludes receipts from the
privatisation i.e. sales of (formerly) public enterprises. In other
words, it does not treat them as a negative public expenditure item.
Some presentations of the public-sector accounts still do show
privatisation receipts in this way, by analogy with the netting out of
sales of fixed assets (council homes, surplus land etc) in the
accounting of public-sector capital spending. In the latter case,
however, what is being calculated is the total of public-sector
fixed-capital formation requiring to be financed. Enterprise
privatisation sales are more usually and correctly classed as financial
transactions which reduce public-sector assets, just as borrowing
increases public-sector liabilities. See Tables 1a and b for the
historical record of GGE(X) and other components of the Public Sector
Borrowing Requirement (PSBR).
In terms of short-term policy decision making, the government focuses
on a somewhat narrower expenditure aggregate, the so-called Control
Total. This is arrived at by subtracting from GGE(X) those expenditure
items which are most affected by cyclical factors and are therefore not
subject to government expenditure policy in the short term (see Table
2). They comprise debt interest and cyclical social security (i.e.
Unemployment Benefit and Jobseekers' Allowance plus income support
paid to people of working age). There are also various accounting
adjustments to adapt the accruals-based (national-income-accounting)
concept of GGE(X) to the cash-based concept of the Control Total. All
this means that the latter is some 15 per cent smaller than the
former.(1)
Philosophy
The government's policy towards public expenditure reflects its
wish to limit the economic role of the state and enhance that of markets
and individuals. This broad objective impinges on public expenditure
from different angles. First and foremost, public spending has to be
financed by either taxation or borrowing. The government attaches high
priority to limiting the weight of taxation (especially direct personal
taxation), partly because of the distorting effects it is alleged to
have on work incentives, and partly because it interferes with
individual freedom of choice. The government attaches correspondingly
less importance to the redistributive role of taxation and public
expenditure in favour of the poor. [TABULAR DATA FOR TABLE 1A OMITTED]
In addition the government aims to minimise the volume of public-sector
borrowing in financial markets. The main reason is presumably that debt
service will require taxes to be levied (sometime) in the future. At any
rate there is no evidence to justify the other possible reason, namely
that borrowing by the UK government in recent decades has in significant
measure crowded out UK private borrowers from credit markets. Charts 1
and 2 reveal no positive correlation between the level of either
government debt or borrowing and long-term real interest rates. The
latter were particularly high between 1982 and 1989 when both the former
were exceptionally low.
For whatever reason, the restriction and even elimination of
government borrowing appears to be a subsidiary principle underlying the
government's strategy. The cash measure of borrowing is the PSBR,
which is projected to fall steadily from 7 per cent of GDP in 1993-4 to
zero in 1999 and to become negative thereafter. The national-accounts
measure is the Public Sector Financial Deficit (PSFD). This further
differs from the PSBR by being struck prior to financial transactions
such as privatisation receipts (which reduce government borrowing needs)
and lending to other sectors (which increases them). In the past decade
the scale of privatisation receipts has caused the PSBR to be
considerably smaller than the PSFD, but this will cease to be true in
the years ahead.
A second set of considerations underlying government [TABULAR DATA
FOR TABLE 1B OMITTED] [TABULAR DATA FOR TABLE 1C OMITTED] [TABULAR DATA
FOR TABLE 2 OMITTED] policy has been the belief that the profit motive
is the only spontaneous and reliable spur to efficiency. Public
production of goods and services which is not profit-driven has been
viewed with suspicion as harbouring a chronic tendency to slackness and
waste. This feeling seems to have become stronger over time, as a result
of the performance of the privatised utilities and other enterprises
such as British Airways. When the business privatisation programme first
got under way in the early 1980s(2), the prominent objectives were to
reduce the PSBR, to widen share ownership, and to shrink the public
sector. Increased efficiency on the part of the industries concerned was
well down the list, because the scope for it was not adequately visible.
The scale of subsequent labour-force reductions and all-round
productivity gains came as an eye-opener. The government was thereafter
determined to reduce the number of its employees. One method of doing
this has been to push the service activities concerned into the private
sector - for which, on occasion, the government was prepared actually to
increase its expenditure. Another method, in cases where it was
unrealistic to privatise the service, is simply to enforce greater
economy of staffing - with almost inevitable, though unstated,
implications for reduced quality of service.
In general, what needs to be appreciated is the limited relevance of
the privatisation experience to the control of public expenditure. This
is essentially because ownership of enterprises is, in principle, quite
separate from the channels through which money flows to purchase the
output of those enterprises. Even when the utilities were publicly
owned, the goods and services they produced were market products sold to
individual customers at (in nearly all cases) ordinary market prices. By
contrast, collective goods, such as defence and law-enforcement, or
merit goods, such as health-care and education, are purchased for the
most part not by individual customers but on their behalf by the
government. The fact that the production activities involved are
undertaken by government employees may be viewed largely as a
coincidence. If these activities were privatised, in part or in whole,
this in itself would have no first-order effect on the volume of public
expenditure.
Indeed the government has privatised ordnance factories and naval
dockyard facilities, and has 'contracted out', on a
competitive basis, services such as cleaning and catering in schools,
hospitals and military establishments - just as it has always purchased
from private manufacturers hospital equipment, school desks, books and
many other material inputs. Likewise assorted civil service functions
have been put out to executive agencies with supposedly more
cost-conscious modes of operation. In all these cases, however, the
Government remains the final purchaser of the services being provided,
which means that such privatisations or contracting out will, apart from
timing, affect the public expenditure ratio only by altering production
costs of the inputs involved. So far any cost reductions achieved by
contracting out have been insignificant. Claims have been made from time
to time that contracting out has achieved substantial reductions in the
cost e.g., of hospital cleaning; but it has not been shown that such
economies are big enough to have perceptible effects on aggregate
expenditure, or that reductions in the cost of services have been
achieved without equal loss of service quality.
It might be asked whether more radical or sweeping privatisations in
these areas could produce better results. After all, in the inter-war
period, when corporate control had only recently left the hands of
owner-managers, new conglomerates or amalgamations such as the big
railway companies, ICI and Unilever were being run by bureaucrats barely
distinguishable from civil servants. The idea that public or private
ownership would make little difference was natural. Since then, even
large-scale private enterprise has learned to place a premium on
entrepreneurship, while public-sector managers are seen to have become
somewhat bogged down in the pursuit of producer interests (as predicted
by Public Choice theories).
Alternatively, efficiency might be further enhanced by applying the
new tougher private-sector managerial style to a public sector grown
flabby. To do so may require replicating private-sector incentives and
ownership. If a hybrid were to be sought in the interest of overall
cost-minimisation, it should attempt to combine tough private-sector
management with the cheap finance uniquely available to the Government
as borrower. As it happens, however, the Government's Private
Finance Initiative, whose projected scale is indicated in Table 2a,
attempts to inject expensive private finance into a residual public
sector! The merit, in the government's eyes, is that this reduces,
in the short run, its need to raise finance in its own name either by
taxation or through a higher PSBR. To be precise, the PFI, like the
privatisation of dockyards, will affect the time pattern or composition
of public spending by removing present capital investment outlays and
subsequently adding the payments needed to furnish the privately owned
capital with its normal remuneration.
Table 2a. Private finance initiative: estimated capital spending
[pounds] million
1996-7 1997-8 1998-9 Total
Defence 30 80 210 320
FCO/ODA 10 10 10 30
Agriculture 10 20 10 40
Trade and industry(a) 10 10 10 30
Education and
employment(b) 20 40 50 110
Transport 1120 1320 1260 3700
Environment(c)(d) 30 30 30 100
Home Office 50 110 60 220
Legal departments 10 20 10 40
National Heritage 20 30 30 80
Health 170 200 300 670
Social Security(a) 130 70 100 300
Scotland(c) 140 360 420 920
Wales 60 150 150 360
Northern Ireland 50 80 80 210
Chancellor's Department 40 40 30 110
Total 1900 2570 2760 7240
Notes:
(a) Joint Bodies Agency/Post Office Counter project recorded against
Social Security.
(b) Excludes private finance activity in education institutions
classified to the private sector.
(c) Docklands Light Railway.
(d) In addition about [pounds]4-5 billion a year of private
investment is levered in through housing, urban regeneration and
other programmes.
(e) Includes Forestry Commission.
Source: Financial Statement and Budget Report, 1996-7, November
1995.
Choice May Prove Costly
Leaving aside, however, the particular shortcomings of the PFI, the
case for state intervention in, for instance, education does not require
that the state itself provide the education. Indeed the liberal case for
intervention on the grounds that a private market would fail to take
into account relevant externalities, limitations of the capital market
and, in a few cases, parental neglect, is better met by vouchers than by
public provision. Imagine, then, that all schools become private-sector
institutions, and that all families with school-age children receive
annual vouchers entitling them to some basic level of education for
their offspring. Certain corollaries follow, especially if, as any
politician would surely pledge, the standard of the education provided
to those least likely to supplement their voucher entitlement was to be
maintained.
First, standards would have to be independently monitored if the
fulfillment of that pledge were to be open to assessment. More
importantly, subject to this constraint, vouchers would probably result
in a higher public-expenditure ratio for education than obtains today.
This is for three reasons:
1. those who presently opt out of state education would, in a fully
liberalised scheme, be eligible to receive valuable vouchers - the
taxpayer would, through vouchers, be paying for the (basic) education of
more children than in present state schools;
2. many of those who do not at present opt out would choose to buy
more when the quantity (or rather quality) was more subject to their
choice. The supply of teachers is not perfectly elastic - more means a
higher price per unit;
3. this variation in quality would be supplied by competing
educational enterprises, which would break down the oligopsonistic and
monopsonistic structures by which teachers' pay has been restrained
in the past - though weakened trades unions might offset this.
Any private educational sector is likely to be dominated by
charitable organisations not fully commercially profit orientated. This
may moderate their response to the incentives represented by a liberal
voucher system. It may also reduce the likelihood that efficiency would
rise in such a system sufficiently to offset the factors listed above as
making it more costly, in terms of public expenditure, for a given
minimum quality of schooling.
The proposition that meeting assured minimum standards for all would
cost the state more under a liberal regime of consumer choice applies to
health no less than to education, and for largely the same reasons. The
UK National Health Service incorporates a highly effective cost control
mechanism - or at any rate did so until the recent restructuring of the
system and the partial introduction of 'internal markets',
which appears to have produced an enormous increase in administrative
costs unmatched by savings elsewhere. NHS cost control has been achieved
partly (as with teachers) by monopsonistic restraints on the pay of
doctors, nurses and other staff, and partly by the rationing of access
to hospital and nursing-home facilities. The suggestion that the present
Government is going to introduce rationing to the NHS is absurd.
Rationing has been endemic to the NHS from its inception, because it has
not seemed socially desirable to meet the total demand arising at a zero
price. The only question is how the rationing is to be done and on what
criteria. The rationale of asking doctors to both establish and
implement the criteria is that doctors are also responsible to a large
extent for determining the demand that has to be rationed. Patients
cannot know enough in most cases to decide what treatment they should be
seeking - but even if doctors decide what demands should be met, it
would be far too extravagant for them to be allowed to do so on medical
grounds alone, without regard to cost.
Questionable Efficiency Gains
The foregoing argument concerning expenditure on education and health
under a liberal regime of consumer choice is consistent with the view
frequently reported in opinion polls that the electorate is prepared to
pay higher taxes in order to finance improvements in services. Such a
statement of preferences need not be wholly honest. But supposed lack of
honesty may also reflect the fact that voters feel themselves powerless
to ensure that higher taxes will in fact be put to their preferred uses.
Moreover, the public would appear to be rather more honest than the
politicians who, faced with such expressions of opinion, describe their
policy in terms which both exaggerate the resources being made available
and simultaneously imply that cuts are harmless and indeed helpful,
because they bring about greater efficiency in service provision.
The verbal obfuscation in question involves two devices. The first is
to talk about any item which retains its share of GDP, and also some
which almost but not quite retain their share, as enjoying 'an
increase in real terms'. This is at least defensible inasmuch as items of money expenditure do actually increase by more than the general
rate of inflation. But then one needs to remember that, whenever average
real incomes rise because of (genuine) national productivity
improvements, any labour-intensive service with little or no scope for
such productivity improvements has to have more spent on it 'in
real terms' just to enable a constant number of its providers to
obtain the same pay rise as everybody else. Hairdressing is a good - and
uncontroversial - example.
The second device is to announce 'efficiency savings' or
'efficiency gains' when what is meant is reductions in
funding. In cases where funding cuts are less than the chosen level of
efficiency gains, the difference is actually claimed to have been
'ploughed back' into the service, as though there were an
increase in funding. Whether one thinks this defensible or not depends
on how far one considers politicians may legitimately go in putting a
favourable gloss on their policies when presenting them to the public -
a point exemplified further below.
If the feeling exists that we get insufficient value at the margin
for our tax money, it may be reasonable for politicians to pledge to cut
back (the growth of) public expenditure (relative to GDP), but such a
pledge is essentially incomplete as a manifesto without spelling out how
it is to be done and what is to be lost. To promise unspecified cuts in
expenditure is as open to the challenge of 'where will the money
come from (the cuts fall)?' as is a promise to raise expenditure
without identified sources of finance. Reliance on 'efficiency
gains' is merely an evasion of the issue, since the existence of
hitherto unrealised opportunities to raise productivity in services
without lowering their quality will be exceptional rather than the rule.
A similar evasion is implied by Mr Dorrell's instruction in June
1996 that the number of children's intensive care units is to be
increased without provision of additional funds. Presumably he would say
that local NHS managers know better than he does where economies can be
made or lower value services displaced. But how does he know that these
services are less valuable, as opposed to less publicisable, than those
of infant intensive care?
Optimal Public Spending and Taxation
In a simple, probably oversimple, model of optimal public finance,
the budget is balanced, with public expenditure and taxation being
jointly determined as follows.
We start with a representative consumer and an arbitrary restriction
to distorting taxes (such as a proportional income tax). In such a model
there is no scope for redistribution, because all consumers are, by
definition, identical; but there might be public goods. The effective
price of such goods in terms of private consumption goods is the cost of
the resources they incorporate plus the deadweight cost of the
distorting taxation necessary to finance their public provision. The
second component generally rises more than proportionately with the
marginal tax rate. In the case of a tax on earnings, it depends
crucially on the elasticity of supply of labour. The suggestion, or
finding, that this elasticity had increased in the last few decades
could therefore serve as an argument for reducing the level of taxation
and of public spending. We know, however, of no study suggesting that
such an increase has in fact occurred - although it may be higher for
married women who now constitute a larger part of the labour force. The
only other argument for lower taxes in this model would be that the
preference for public goods had weakened. We do, of course, have no
direct evidence of that having occurred either.
In any case there is a deep flaw in the representative agent model,
or rather in associating that model with distorting taxation. In the
absence of heterogeneity (e.g. skill and wealth differentials) there can
be no argument against lump-sum taxes - such as the notorious poll-tax -
which do not distort. In fact there may be scope for non-distorting
lump-sum taxes even when people do differ. All poll taxes prior to Mrs
Thatcher's differentiated by social status. Dukes paid more than
knights who paid more than dustmen.
If differences in earning power rule out lump-sum taxes, we can save
our model but we also have an opportunity to redistribute income by
taxing the rich to give to the poor. The tax can no longer be
proportional, but it can still be linear, giving a fixed amount to
anyone with no other income. The extent to which such redistribution
should occur will in turn depend on two parameters. One is the extent to
which the taxpayers, probably the adult majority and thus the
controlling power over decisions in a democracy, identify with the
recipients. This is sometimes called 'social solidarity'. The
other is the number of the deserving sick, old or unemployed eligible
for support. The 'preference' for redistribution would
typically take the form of saying that the least well off should have a
particular proportion of what other people (on average) have. Such a
preference implies that if there are more sick, more old, or more
unemployed, taxes should be higher - even if, at the same time, the
support given to each is indeed adjusted downwards.
It is sometimes said that taxes, such as those needed to finance
redistribution or the supply of public goods, reduce the nation's
competitiveness, and that in a world of increasing competition,
particularly from the Far East, we can no longer afford to express our
social solidarity to the same degree. This is not very convincing. Any
fiscal handicap to competitiveness can be offset by an appropriate
reduction in pre-tax wages. If external competition makes the nation
less rich than it otherwise would be, that is no reason to impose
disproportionate penalties on the retired, the unemployed or the
disabled.
We have already seen that an increase in unemployment or inactivity
would, by increasing the number of beneficiaries, increase the revenue
necessary to maintain a given ratio of benefits to earnings. It would
then be appropriate, other things being equal, to reduce the replacement
ratio in order to limit the rise in the distorting tax. This could occur
at a given level of social solidarity, regardless of the reasons for
rising inactivity. If, however, rising inactivity is widely attributed
to shirking on the part of adherents of an alternative or alien
dependency culture, it is then also likely that social solidarity, the
degree of identification of those in work with benefit recipients, will
fall.
It follows from what has been said that in the model of
redistribution we would expect the scale of transfers - and the level of
distorting taxes - to be higher where there is more social solidarity, a
higher incidence of incapacity or unemployment, and (again) a lower
elasticity of supply of labour.
Where there are both disadvantaged people and public goods the two
mechanisms interact in a fairly straightforward way. A greater demand
for redistribution or for public goods leads, if met, to higher tax
rates which raise the cost of meeting unchanged demands for the other
uses to which public expenditure can be put. It follows that an increase
in any one use should be met only partially by higher taxation and
partly by a crowding out of other uses.
Thus, production of public goods should rise with:
the taste for public goods
and should fall with a rise in:
social solidarity the number of the disadvantaged the elasticity of
aggregate labour supply
Transfers should rise with:
social solidarity the number of the disadvantaged
and should fall with a rise in:
the taste for public goods the elasticity of aggregate labour supply
while tax rates should rise with:
the taste for public goods (average tax rate - to increase revenue)
social solidarity (marginal tax rate - to increase progressiveness) the
number of the disadvantaged (both) the inelasticity of labour supply
(both)
A persistent rise in the normal level of unemployment - say by 5
percentage points in a non-cyclical context, such as seems to have
occurred since 1970 - would with an unchanged income replacement ratio,
impose costs which could not be financed by borrowing. If the unemployed
were representative workers and labour force participation rates were
unchanged, output would fall by about 5 per cent. If the replacement
rate was 50 per cent and labour's share in GDP 2/3, the job losers
would receive 1.75 per cent of base GDP, 1.85 per cent of new GDP or 2.8
per cent of earnings.
The arguments given above imply that in these circumstances tax rates
should indeed rise, and both generosity to the unemployed and the
provision of public goods decline somewhat. Within this sort of
comparative-static framework, to expect to be able to reduce tax rates
while normal unemployment was rising presupposes changes in the taste
variables - either social solidarity or the preference for public goods
would have to be falling too.
These textbook exercises relate to the theoretically optimal levels
of taxation and expenditure as determined by the levels of public
preferences, solidarity and labour supply responsiveness. While one can
infer a consequent relationship between changes in each set of
variables, this may not do justice either to the incremental nature of
policy decisions or to the perceived political cost of rapid adjustment.
Gradual adjustment has, for instance, been achieved in the ratio of
pensions to earnings since the indexation of old-age pensions was
switched from earnings to prices and as real earnings have risen.
Changed perceptions of the relevant parameters may have led to the
decision to change the policy, but they do not plausibly account for the
path along which the ratio has, in the event, fallen.
The argument hitherto has assumed that we were comparing alternative
equilibria of our political economy. If taxation and expenditure had
each diverged from the trend that was optimal given evolving preferences
etc., the attempt to adjust them downwards might merely be designed to
correct previous failures to optimise. Evidence here too is inevitably
hard to find. In its absence it is as likely that recent changes have
represented a departure from an unchanged optimum as a return to it.
Trends in Total Government Spending and Taxation
The aim of keeping taxes, and hence government spending, as low as
possible has acquired an air of a new political consensus. Despite
doubts cast upon it by opinion polls, Tony Blair clearly believes that
it is necessary to join the denunciation of earlier 'tax and
spend' philosophies if New Labour is to have its turn in power. The
reduced political acceptability of taxes seems to be just that, a
diminished preference for public relative to private goods, or a decline
in social solidarity, in which the role of politicians as leaders or
followers is unclear. At any rate, there has been no demonstrated rise
in the welfare costs of distorting taxes.
Politicians sometimes imply that there is a need to counter some
inexorable tendency for the ratios to GDP of public expenditure, and
hence of taxation, to rise, or to have reached, by inadvertence,
insupportable levels. Such a tendency might be ascribed to the political
consequences of universal suffrage. Taking a very long-term historical
and wide-ranging geographical view, the twentieth century has seen a big
rise in the public-expenditure and taxation ratios in all industrial
countries. But if one adopts the more specific frame of the United
Kingdom in the past 25-30 years, the picture is different (see Tables
1a, 1b and 1c). In particular:
* the trend of both expenditure and tax ratios since the end of the
1960s has been flat, with a range of fluctuation of about 6 percentage
points of GDP.
* GGE(X) peaked in 1975-76 at over 47 per cent of GDP; the tax ratios
peaked in the years 1981-83, total current receipts at 46 per cent and
non-North sea taxes and national insurance contributions at 39 per cent.
* non-North Sea tax and NIC receipts at present amount to some 36 per
cent of GDP, about 1 percentage point higher than when the Conservatives
were elected to power in 1979. GGE(X) in 1995-6 was 42 per cent of GDP,
the same as in 1978-79.
* compared with other OECD countries, the UK figures were about
average in the mid-1970s but are now well below average. In the
mid-1990s the only European industrial country with a lower public
expenditure ratio than Britain was Switzerland at 38 per cent, about the
same as Australia. Japan and New Zealand were fractionally lower at 37
per cent, and the USA lower still at 33 per cent.
The tax figures mean, of course, that income tax reductions in
Britain during this period were one element of a restructuring from
direct to indirect taxation, which involved large increases in VAT and
excise duties. The old marginal income tax rates on high incomes (before
1980) of 85 per cent on earnings and 98 per cent on investment income
were absurd, and probably did not contribute to revenue (cf the Laffer
curve). Top marginal rates (with national insurance included) of 50-60
per cent are probably appropriate, but in fact that particular limit
does not now bind on higher incomes. The highest net marginal rates -
allowing for withdrawal of benefits as well as imposition of tax -
unquestionably apply at the bottom end of the income spectrum. The
Government has shown much less enthusiasm for remedying this than for
reducing marginal rates at the top end, partly no doubt because it is
much harder to achieve without either an unacceptable cut in all benefit
levels or a serious sacrifice of revenue to the Exchequer. (See the
article by Tony Atkinson on pp. 90 of this Review.)
The claim before the event that reduced marginal tax rates at the
upper end would unleash entrepreneurial energies and reduce the highest
pre-tax salaries has not proved to be justified. On the contrary,
pre-tax hourly (or per-unit-of-effort) pay differentials have widened
substantially. If highly skilled or energetic individuals supplied more
input as the tax rate fell, the relative price of their time/effort
should have declined. It has not done so. Demand must have shifted - or
been manipulated - in their favour.
The widening of differentials benefited income tax revenues. The
halving of top marginal rates has, in fact, been followed by a sharp
rise in the share of income tax receipts from higher earnings. Some of
this may be attributed to a lessening of income tax avoidance and
evasion measures.
By far the largest single category of UK government spending is the
social security budget. In the years 1992-95 it amounted to roughly
one-third of the total or 13 1/2 per cent of GDP. This category consists
of transfer payments, as opposed to purchases of goods and services. The
major programmes in the latter category are healthcare, education and
defence. Health and education together make up about 30 per cent of
today's public spending or over 12 per cent of GDP (see Table 3).
More significantly, social security is responsible for much of the
upward pressure upon the UK public expenditure ratio in the past two
decades, its share of GDP having risen from 9 to 13 1/2 per cent. On the
goods and services side, outlays on health and personal social services increased their share of GDP by 1 1/2 percentage points. Increases
elsewhere, for example on law and order, were more than offset by cuts
in the share of defence, housing and other areas. In what follows we
comment on some aspects first of expenditure on goods and services and
then on social security.
Education
In the case of UK public education, its statistical share of UK GDP
has remained roughly constant in the past quarter century, at a little
over 5 per cent, with some cyclical fluctuation (see Table 3). In the
school sector, which accounts for the bulk of spending, this has been
consistent - [TABULAR DATA FOR TABLE 3 OMITTED] thanks to a drop in
pupil numbers following low birth rates after 1970 - with a modest
decline in the pupil/teacher ratio, although that ceased in the early
1980s and at a level which compares very unfavourably with independent
schools. Indeed, the pupil/teacher ratio in independent schools has
continued to decline steadily, so that in the mid-1990s it was only half
that in the state sector, a bigger gap both relatively and absolutely
than that obtaining 20 years earlier (Table 4).
The pupil/teacher ratio, though acknowledged as an important index of
quality, is not the only indicator of relevance. Direct measures of
pupil attainment have shown that average English secondary school
graduates are typically a year or more behind their continental
counterparts in terms of mathematical and other competence(3). In
addition, there are two areas where UK education provision has lagged
well behind that of continental European countries, namely pre-school
(nursery) facilities and part-time vocational or continuing education for early school leavers, particularly bearing in mind that a far higher
proportion of pupils leave school at 16 in the UK than in the rest of
Europe.
However, cross-country data on public education spending, whether as
a share of GDP or per pupil in the respective institutions, do not
suggest that the UK's shortcomings are a consequence of any overall
financial [TABULAR DATA FOR TABLE 4 OMITTED] parsimony (Table 5). For
example, UK expenditure per primary and secondary school pupil in 1992,
though below those of Scandinavian countries, Austria and (surprisingly
perhaps) Italy, looks not ungenerous by comparison with Germany or the
Netherlands. Britain comes higher up the ladder with primary than with
secondary education. All this suggests that a balance needs to be struck
between the case for greater financial provision in [TABULAR DATA FOR
TABLE 5 OMITTED] toto and other measures, such as redistribution of
existing resources and stronger focus on academic attainment for pupils
of average ability. The National Curriculum, and approximately
quadrennial assessment of attainment levels, represent moves in this
direction, but considerable further progress will be required to match
continental European standards. (See the Commentary by Sig Prais on p.3
of this Review.)
When it comes to higher education, the 1990s have been a period of
particularly rapid change in the UK, so comparisons need to be made with
caution. Historically, the position has been that Britain sends a much
lower proportion of its 18+ population than other industrial countries
to higher education, and especially to university; and moreover that the
length of their study courses is on average about one-third less than in
other countries. However, the amount of public money spent per student
has been at the top of the range, to a large extent because students
have been more intensively and personally taught. One consequence has
been a considerably lower drop-out and failure rate than in most other
higher-education systems. Meanwhile, the fraction of GDP devoted to
higher education has not been out of line with that in other countries
(Table 5).
The changes that have come about chiefly since the mid-1980s have
increased very substantially the proportion of school-leavers proceeding
to higher education; the figure is still below that of most industrial
countries, but by much less than formerly. In the mid-1990s about one in
three 18-year-olds goes on to higher education, compared with one in six
in the early 1980s and one in twelve in the early 1960s. There has,
however, been no corresponding expansion of public spending on higher
education since 1980. Consequently the student/teacher ratio, after
rising very slowly for some fifteen years up to the mid-1980s has
climbed steeply from about 8 1/4 (in universities about 10) to 13 1/2 in
1993-4 (Table 6). In addition, average pay in the sector has been kept
significantly below the pay of other occupations formerly considered
comparable.
The insistence on greater student throughput per unit of resource in
higher education, together with a proliferation of bureaucratic control
procedures, Teaching Quality Assessments, Research Assessment Exercises,
and other investigations affecting the distribution of [TABULAR DATA FOR
TABLE 6 OMITTED] funds, have intensified uncertainty and competitive
pressures within the sector, and have weakened both professional
solidarity and mutual commitment between employer and employee.
Health (NHS)
In the case of the National Health Service, a gently rising share of
GDP has gone together with, and is to a large extent explained by a
striking change in the aggregate production function of health-care
services (presented in Tables 7 & 8). The number of hospital beds
has been declining for several decades, and since 1971 alone has fallen
by over 40 per cent. At the same time medical staff numbers are more
than 20 per cent greater than they were in 1971. Staff numbers per
hospital bed have thus more than doubled. In the case of doctors - both
GPs and hospital doctors - the increase in numbers has been
uninterrupted. In contrast, hospital technician numbers peaked in the
early 1980s and numbers of nurses in 1989, not surprisingly given the
continuing fall in the quantity of beds to be attended.
The underlying change may be summarised as labour-using technical
progress in health-care - or to be more precise, in acute health-care.
The phenomenon is an aggregative one, comprising many different strands.
Some of these strands run counter to the overall trend, for example the
development of expensive items of equipment such as scanners, or
advances in the care of premature babies. Others are matters of fashion,
for example the abandonment of routine tonsillectomy. The main strands,
however, which have contributed to the aggregate trend include progress
in anaesthetics, which has drastically shortened periods of
post-operative recovery - more so than progress in surgery itself,
though that too has been important in various fields (eg.,
ophthalmology) - wider use of chemo- and radio-therapy in cancer
treatment and advances in pharmacology, such as the [TABULAR DATA FOR
TABLE 7 OMITTED] development of psychotropic drugs for treatment of
mental illness, which has been critically important in reducing the
in-patient population of mental hospitals.
Separate from the technical development of acute health care is the
growing need for chronic care of the elderly. In Britain as in other
industrial countries, life expectancy has risen in the past few decades,
while a generation of low birth rates is influencing the size of the
younger adult population. The proportion of elderly people is rising,
with particularly sharp increases in the oldest groups (over-80s - see
[ILLUSTRATION FOR CHART 3 OMITTED]). To some extent the associated
health-care needs are reflected in the total staff numbers already
noted, since the elderly also make disproportionately heavy use of acute
services. It is noteworthy, however, that staff numbers in personal
social services delivered by the public sector have not increased in the
past decade, although they rose quite steeply in the preceding fifteen
years. A growing share of provision in this domain has come from private
sources; and a growing [TABULAR DATA FOR TABLE 8 OMITTED] share of the
costs has been carried within the private sector. This is in line with
government policy objectives, besides being in many cases desirable.
Care of the elderly is more suited to private-sector organisation and
finance than some other aspects of social services, e.g. care of
disadvantaged children.
It raises, however, the question of what proportion of total
prospective demand in this area can realistically be financed from
private sources, and of the proper contribution of public policy to the
encouragement of such private finance. The 1996 Budget relaxed somewhat
the asset rules governing eligibility for government assistance with the
cost of residential care. The level of assets below which entitlement to
assistance begins was doubled to [pounds]16,000, while the level below
which assistance is comprehensive with no contribution expected from the
recipient was more than trebled to [pounds]10,000. The government also
announced its intention to encourage greater financial provision for
long-term care, possibly via partnership schemes which would involve
more generous asset eligibility rules for those with appropriate
insurance arrangements in place. The difficulty will be to attract
sufficient numbers into such insurance arrangements to get their cost
down to a reasonable level. The optimum may be universal compulsory
participation, accompanied by a measure of public regulation - as with
the natural monopolies. If the government shrinks from this, it may be
drawn into a measure of insurance subsidisation, at least in the earlier
stages.
The obfuscation generated by references to 'efficiency
savings' in public expenditure is particularly striking in relation
to the NHS. As a specific illustration, consider the November 1995
post-Budget press release of the Department of Health. Referring to
'a substantial increase in resources for patient care', the
Secretary of State, Stephen Dorrell, said:
'Current spending on health will grow by [pounds]1.3 billion in
1996-97, equivalent in real terms to 1.6 per cent or some [pounds]500
million. Hospital and community health services current spending will
grow by 1.1 per cent in real terms.
Patients can look forward to further improvements in NHS services
next year made possible through the combination of the new money
announced today, through further improvements in efficiency - focusing
resources from management onto patient care - and through ensuring that
pay rises are earned through increased efficiency, in line with our
policy on public sector pay.
For 1996-7, I am again setting health authorities a challenging
target for efficiency savings of 3 per cent - equivalent to [pounds]650
million - which will be ploughed back into the service, in line with our
past pledges. An important contribution to this will be the planned
savings of some [pounds]130 million - 8 per cent in real terms - from a
reduction in the management costs of NHS trusts and the costs of running
health authorities'.
A rough explanation of this gobbledegook is as follows. Begin with
the [pounds]130m planned cuts in administrative costs of NHS trusts and
Health Authorities. This is a cash figure. The constant price
('real terms') equivalent is [pounds]50m. Deducting it for the
moment from the total efficiency savings of [pounds]650m demanded of
Health Authorities leaves [pounds]600m or about 2.75 per cent to find.
Why choose this figure, given that efficiency savings are anyhow to be
'ploughed back' into health spending? The answer is that the
government would like NHS pay rises to be limited to this figure, which
is equal to the forecast rate of general price inflation. Assuming real
wages in the NHS thus unchanged, the announced real-terms increase in
current health outlays of 1.6 per cent for 1996-97 represents provision
for a renewed rise in staff numbers or other current expenditures
(including additional pay rises). Clinical staff numbers may further
benefit from the aforementioned cut in administrative outlays,
approximately equal to 0.16 per cent of total NHS spending.
In the long run pay rates must be expected to rise at the same
average rate in the NHS as in other parts of the economy. It sounds
impressive to say that from 1977 to 1994 spending on health
'increased by around two-thirds in real terms...., equivalent to an
average growth of just under 3 per cent a year'.(4) About seventy
per cent of this 'real growth', however, reflects the rise in
real wages over the period as economy-wide productivity increased; that
part only represents any increase in physical capacity in health care to
the, probably very limited, extent that labour productivity has risen
there too. The remainder is essentially accounted for by the modest net
increase in NHS staff numbers and a shift in the composition of staff
towards more highly qualified, and therefore expensive, individuals
(i.e., more doctors relative to nurses, technicians etc).
The government's demand for visible 'efficiency
savings' is met in the form of increased 'activity rates'
which are supposed to be required by health-care purchasers (District
Health Authorities and Fundholding GPs) as a condition of agreeing
contracts with health-care providers at higher rates of pay for the
forthcoming year.(5) The activities are measured in units such as
finished consultant episodes (FCEs), community contacts, outpatient
attendances and so forth. Contracts are settled in advance on the basis
of forecasts and promises. This means that many increases in activity
rates will be fictional, and that there are few if any genuine payments
per item of service. Such payments arise systematically only in the case
of extra-contractual referrals (ECRs) across Health Authority
boundaries. Moreover, as with any physical planning system, activity
goals create questionable incentives. The number of FCEs is increased by
referring patients from one consultant to another. The average period on
surgical waiting lists can be shortened by bringing in non-urgent cases
after 6 months instead of 9 or 12, while urgent cases are made to wait
for six weeks instead of two. The Patients' Charter (introduced in
April 1992) guaranteed admission for treatment no later than two years
after being put on the waiting list. It also stated that patients are
entitled to information on maximum waiting times in their locality.
Since then the proportion of patients waiting over twelve months has
fallen (from 18.3 per cent in 1991 to 6.3 per cent in 1994 - see note
4), but - surprise, surprise - the total number of people on the waiting
list has increased. Doubtless many of them are on the list for 11 1/2
months.
More important, the activities that are being measured are not final
outputs but intermediate services, whose relation to the desired final
output is far from being assured or constant. It is like rewarding
financial portfolio managers by their volume of transactions or rate of
turnover. In the case of portfolio managers a simple measure of final
output is available, namely the return on the portfolio. But not,
unfortunately, with health. Health outlays contribute to indicators such
as infant survival, life expectancy, and incidence or prevalence of
certain diseases. But the quantitative extent of their contribution is
uncertain, and generally modest by comparison with other factors such as
general prosperity, life styles and environmental conditions. Some of
these factors are themselves influenced by public policy, but not from
the side of health care: doctors may lobby against cigarette advertising
or leaded petrol, and in favour of jogging, but they are not responsible
for action in these areas. At the same time, health spending includes
important activities which make no contribution to standard indicators
of population health e.g. terminal care.
All this also means that the huge extra administrative expense
involved in drawing up thousands of individual purchaser/provider
contracts is bound to be largely wasted, because the objects of
negotiation are the intermediate activities and not the desired final
output, which is of course not readily defined in negotiable quantitative terms. The orders of magnitude involved may be gleaned from
the twentyfold increase in the number of NHS managers in 1988-94,
raising their salary bill in real terms from [pounds]26m to [pounds]500m
(or about 1 1/2 per cent of NHS spending).(4)
Defence
Defence expenditure has actually fallen in recent years, as Table 3
shows, not only as a proportion of GDP but also in real terms. The
ending of the cold war raised the prospect of a 'peace
dividend' available either to reduce taxes or to permit higher
public expenditure on other things.
An implication of the model presented above, where it was suggested
that optimum expenditure on public goods and transfer payments would, at
least in part, tend to crowd one another out, is a similar relationship
between different public goods. Increased demand for defence means some
extra taxation and some reduction in civil public expenditure. This
linkage should obviously operate symmetrically when defence needs fall.
There are, however, two qualifications on the simple harvesting of
the peace dividend. The first is that, although the ending of superstate confrontation probably reduces demand for nuclear weapons, they are
actually cheaper to maintain in being than a comparably effective
'conventional' force. But the end of the cold war may increase
the demand for conventional types of forces, by the unleashing of petty
nationalism as we have seen not only in the former Yugoslavia but also
in various parts of the Former Soviet Union. We may then need more of
the forces deployed in the Gulf, or infantrymen to keep the peace in
Bosnia or Northern Ireland. Thus the impact on the composition of our
defence effort may be bigger than that on its cost.
The second point is that the resources committed to defence
industries are very specialised. We know that defence conversion is a
major task for the former USSR. It is only easier for us to the extent
that we are cutting less and relied less on exclusively military and
remotely located industrial complexes.
The lesson of US experience, and of our own earlier defence cuts, is
that the labour freed from military production is not always rapidly
reabsorbed into civil industrial employment. If there is a dividend, it
is reaped not when a military factory is closed but when its former
employees stop drawing the dole and start contributing to civil output
and paying taxes.
The difficulties of this transition are likely to lead people to seek
to sell abroad the military production no longer taken up by the British
forces. Not only is this undesirable as it contributes to the probably
destabilising proliferation of weapons, but it is also unlikely to be
profitable given that Eastern Europeans too are slashing the prices of
their arms exports. Depending on the scale of the arms concerned, such
sales could at best buy a breathing space. The idea that the reduction
in mainstream orders is likely eventually to be reversed is almost
certainly an illusion.
Thus, all in all, we have reaped something of a peace dividend and
may continue to do so for a little longer as those made redundant from
defence industries find productive re-employment elsewhere.
Social Security
As mentioned above, a rising share of GGE(X) in recent years has been
spent on Social Security which has risen to one-third of the whole. This
in turn can be disaggregated into support for the unemployed, for
pensioners and other items as in Table 3. It is likely that much of the
extraordinary increase in sickness benefits since the mid-1980s
represents a displaced form of unemployment assistance, consequent upon
the tightening of criteria for payments of overt unemployment benefit.
Certainly there has been no disproportionate increase in rates of
sickness benefit, nor any reason to suspect a genuine deterioration in
the health of the working population.
We have already noted the historical trend of apparently rising
normal levels of unemployment which the UK has shared with much of
Europe, and which we saw was likely to raise National Insurance
Contributions by about 3 percentage points or taxation more generally by
2 per cent of GDP. The high cost of unemployment compensation
intensifies debate about the form it takes. For how long should the able
unemployed receive higher levels of benefit than other social security
beneficiaries? How stringently should the tests of availability for work
be applied? What training programmes should the unemployed be required
to attend? We cannot pursue these questions here, but adjustment in
these dimensions of our arrangements should probably precede those in
the basic level of benefits themselves.
Lower levels of employment, lower birth rates and longer lives while
retirement ages were fixed (at 60 for women and 65 for men) have
inevitably increased the 'dependency ratio' of pensioners to
the working population. Indeed during recessions, and as part of
corporate 'downsizing', effective retirement ages have
actually been falling while life expectancy and fitness among the
elderly have been rising. While most of the financial burden of early
retirement has hitherto been carried by private pension schemes, there
is almost certainly some spillover onto state pension take-up as well.
In general, longer life and health (see [ILLUSTRATION FOR CHART 3
OMITTED] and Table 9) have pointed to a higher retirement age;
recession, downsizing, and possibly more rapid obsolescence of skills,
may have pointed to a lower age. The issue has also been complicated by
the requirement of equality between the sexes in these respects,
eliminating the earlier retirement age of women (who normally live
longer than men) as well as by the argument that a lower retirement age
would increase employment opportunities for the young. There may be some
truth in this last argument, but it is rendered irrelevant by the fact
that any reduction is likely to 'grandfather' most existing
employees. This means that the number of retirements does not rise for
decades to come, for which time the conjunctural appropriateness of the
delayed impact is unknowable. In the short term there may be some
reclassification of the older unemployed as retired; this, of course, is
only a presentational effect, nonetheless attractive to politicians for
that.
More generally, there is much to be said for greater neutrality in
the effect of state pension schemes on retirement ages, by making
contributions and benefits mutually more congruent at the margin. For
example, persons who postpone drawing their state pensions for a number
of years arguably do not receive adequate incremental benefit later as a
result. Under present rules one needs, as a first approximation (or rule
of thumb), to live to more than 88 years of age before a five-year
deferment of state retirement pension becomes worthwhile. It will be
interesting to see whether the Labour Party's promised anti-ageism
will extend to banning compulsory retirement ages altogether, as has
occurred in the United States.
On demographic grounds some rise in retirement age would seem
desirable to reduce dependency ratios - which are also raised by the
larger periods over which the young are now being educated. Recurrent
education or retraining may also be the answer to the rapid obsolescence
of skills acquired when young.
As shown in Chart 4, on present policies the prospects for public
expenditure on pensions in the UK are very much more favourable to the
low tax lobby than is the position of most other OECD countries. This is
for three reasons. The first is that the demographic changes raising the
dependency ratio are operating much more moderately in the UK than
elsewhere. Among the G7 countries, the ratio is expected in the next few
decades to be lower than in the UK only in the US.
The second reason is that in 1980 the basis for up-rating basic state
pensions shifted from a link with earnings to a link with prices. In the
recession of the early 1980s real earnings actually fell, so that the
initial impact of the switch was the opposite of that intended i.e. it
raised the real income of pensioners relative to the working population.
Since then, however, earnings have outstripped prices by about 2 per
cent per annum. Thus the basic state pension has fallen by 25 per cent
relative to average earnings.
Table 9. Expectation of life(a) in the United Kingdom: by sex and
age
years
1901 1931 1961 1991 1993 1996 2001 2021
Males
At birth 45.5 57.7 67.8 73.2 73.6 74.4 75.4 77.6
At age:
1 year 54.6 62.4 69.5 73.8 74.1 74.8 75.7 77.9
10 years 60.4 65.2 69.9 73.9 74.2 75.0 75.9 78.0
20 years 61.7 66.3 70.3 74.2 74.5 75.3 76.1 78.2
40 years 66.1 69.3 71.4 75.1 75.4 76.3 77.2 79.3
60 years 73.3 74.3 74.9 77.7 77.8 78.6 79.5 81.4
80 years 84.9 84.7 85.2 86.4 86.4 86.8 87.2 88.2
Females
At birth 49.0 61.6 73.6 78.7 78.9 79.7 80.6 82.6
At age:
1 year 56.8 65.3 75.1 79.2 79.3 80.1 80.9 82.8
10 years 62.7 67.9 75.4 79.4 79.5 80.3 81.1 83.0
20 years 64.1 69.0 75.6 79.5 79.6 80.4 81.2 83.1
40 years 68.3 71.9 76.3 80.0 80.1 80.9 81.7 83.5
60 years 74.6 76.1 78.8 81.9 81.9 82.6 83.3 84.9
80 years 85.3 85.4 86.3 88.3 88.3 88.8 89.1 90.0
Notes:
(a) Total number of years which a person might expect to live.
Source: Government Actuary's Department; Social Trends, 1996.
We know from recent debates that the present Government adheres to an
absolute concept of poverty. If the absolute standard of living obtained
by pensioners was acceptable in 1980, the same absolute standard should
be acceptable, they suggest, in 1996. This argument is highly
controversial. For a number of reasons adumbrated above, social
solidarity and tax tolerance might well point towards relative incomes
as a basis for such transfers. Nevertheless, these same reasons would
imply that adverse demographic developments (a fall in the share of the
population at work) would lead not only to higher contributions/taxes,
but also to lower pensions relative to earnings.
The other complication is that the government view relates not to
what would be satisfactory standards of life but to acceptable
guaranteed minima. This is the third reason for Britain's
favourable-looking fiscal position on the pensions front. The tendency
in Britain - with government encouragement - is for people to supplement
the state minimum with their own private pension, either on their own
account or, more usually, through their employers. Such supplements are
relatively much bigger in Britain than in most other industrial
countries and are not recorded on the graphs in Chart 4, which
accordingly underweight the pensions sector of the British economy. An
advantage claimed for the British system is that, unlike state pensions,
private pensions are funded. As a result, they may raise total savings
and thence national wealth. On the other hand, it would, in principle,
be possible to fund state pensions and the administration of private
schemes may be disproportionately costly. These costs may deter people
from buying adequate pensions for themselves and/or represent social
inefficiency.
The upshot of all this is that the freezing of the basic state
pension at its real value of 1980 is likely to come under increasing
pressure over the years, even if occupational and individual
supplementary provision does increase. On the assumption, however, that
the present policy is maintained, OECD projections suggest that the UK
tax burden would fall further behind the European average over the
coming decades.
Britain could, on its own, save more now, investing both at home and
abroad to provide for better pensions in the future. If, however, all
the industrialised countries together attempt to follow this path, they
run two risks. The first is that pursuit of higher savings through a
rising fiscal surplus may involve reducing aggregate demand and
activity, thereby sacrificing output and, if anything, depressing
savings. The other is that, notwithstanding recent theories of
endogenous growth, a general rise in investment would encounter
traditionally diminishing returns, unless matched by the extra labour
input available from an extended working life and higher average ages of
retirement.
Public Spending and Macroeconomic Prospects
From the wider macroeconomic viewpoint, the government is to be
commended both for giving priority over tax cuts to the containment of
the PSFD and for combining restrictive intentions in the fiscal sphere
(even if these intentions have not yet delivered a decisively reduced
deficit) with a relatively relaxed monetary policy. The background to
this is that inflation has been substantially lowered and has reverted
to the annual rates which characterised the 1950s and 1960s. At the same
time, the economy retains a margin of spare capacity; the sterling
exchange rate remains unpegged; and Britain's current balance of
payments continues in deficit and looks vulnerable to further
deterioration in the next consumer spending boom. While wage pressures
remain moderate, it is appropriate to promote export-led expansion by
means of monetary policy designed to keep the exchange rate at a
suitably competitive level.
Success in permanently raising employment and lowering the average
level of unemployment would both raise revenue and reduce social
security spending. We have seen that the latter aspect alone might
amount to 1 per cent of GDP if half the rise in unemployment between
1975 and 1995 were to be reversed.
We have referred to the likelihood that the government will come
under pressure sooner or later to improve the real level of state
pensions. Equally powerful cases can be made for allowing an extra 1/2
or 1 per cent of GDP to flow into public provision for health care and
education over a number of years. This would not constitute a great
bonanza but would permit very worthwhile, even urgent, improvements not
presently attainable, while preserving appropriately rigorous control on
total budgetary resources.
NOTES
(1) The government itself, or at least its printers, seem to have
some difficulty remembering what is included where. In the 1996-7
Financial Statement and Budget Report, paragraph 6.73 on p.134
contradicts earlier paragraphs by stating (clearly incorrectly) that
GGE(X) includes privatisation proceeds.
(2) Sales of local authority houses had begun under the preceding
Labour government in the 1970s.
(3) On this and the following facts see the numerous articles on
schooling, vocational training and economic performance in Britain and
various continental European countries published in the Review over the
past fifteen years by S.J. Prais and colleagues.
(4) Sally Prentice, 'Health Policy and Care' in D. Halpern
et al eds. Options for Britain (Dartmouth 1996), p. 162.
(5) NHS Executive, Costing for Contracting Manual, Leeds, Department
of Health 1993.