Chancellor faces a Big Squeeze

Last Modified: 09 Oct 2007
By: Faisal Islam

Health and education spending continues to grow at slower rates but there are signs the economy is faltering.

The Chancellor did not have a huge amount of room to play with.

Years of big public spending rises under his predecessor are coming to an end, taxes are already rising and he was boxed in by Tory tax cut plans.

He had to make the best of a Big Squeeze.

At the budget in March, the Treasury expected the economy to grow by between 2.75 per cent and 3.25 per cent next year.

Now, Mr Darling thinks growth this year will hit that earlier forecast, but next year he has marked down expected growth to between 2 per cent and 2.5 per cent.

The Chancellor blames that on the current money market turmoil, but in part the borrowing is funding extra spending in education.

The tougher economic environment means that after years of flinging money at the public services, Mr Darling is now presiding over a public spending squeeze.

Education budgets in England will rise over the next three years by 2.8 per cent above inflation.

That is about half the rate of growth we have seen under Labour since 1999.

Aid is planned to grow by 11 per cent each year in real terms.

Departments like Business and Enterprise, Justice, the Law Officers' and the Chancellor's departments will all be cut.

Of course health, the biggest spending department, is central to how Labour tries to seperate itself from the Conservatives.

Over the next three years, budgets will rise by 4 per cent.

But as with education, that is a squeeze. Health spending has been growing by more than 7 percent a year.

With little cash to spare, Mr Darling has had to look for some reforms that allow him to something eye-catching. And to do that he has turned to the City Fat Cats to squeeze.

In a move echoing the Tories, he is proposing new taxes on so called Non Domiciles, people living in Britain but not paying taxes here. That raise £800 million.

He is also planning changes in Capital Gains Tax that will raise £750 million by 2010, and more in years to come.

The current system of taper reliefs will be scrapped, and a new single rate of 18 per cent will be introduced.

All this is designed to finance changes in Inheritance Tax, again visiting the Tories tax territory.

The tax allowance goes up to £350,000 from 2010.

But also that allowance can now be transferred between married couples and civil partners, effectively doubling the allowance and ensuring the vast majority of people will not pay it, but that is at a cost of £1.2 billion.