The Implications of the Comprehensive Spending Review for the Long-Run Growth Rate: a View From the Literature

Abstract

In I998 the Government set out its expenditure plans for the remainder of the current Parliament in the Comprehensive Spending Review. Announced within this were large increases in expenditure on education, health and capital spending with the objective of meeting the Government's manifesto pledges. Yet as the recent report by the Treasury on the UK's trend rate of growth states, the expenditure plans of the CSR may also help to raise the growth potential of the economy, although no quantitative assessment of this was made. Using evidence from the empirical growth literature, this article examines the possible effects of these policies on the long-run growth rate of the economy. In general the results from the empirical literature are non-robust, but by conducting a very different style of review we are able to identify several studies from which to determine what these effects might be. Using a stylised version of the CSR we estimate that it may raise the long-run growth rate by as much as 0.I of a percentage point per annum, although there is some sensitivity to the underlying assumptions. This appears to confirm the likelihood of modest upside risk to the Treasury's estimate of trend growth.