How much money does the Government actually spend?
How much money do we spend... where does it go... and who benefits?
Summary:
The Government currently spends over £1.2 trillion per year (about 40% of the country’s GDP).
A lot of this goes on cash transfers (pensions, working-age welfare, and disability support) and healthcare/social care provision.
Our spending patterns aren’t outside the norm among European countries. Although more productive and faster growing countries in the Far East spend less than us as a percentage of GDP, and most have less generous social security.
Britain faces higher spending commitments (linked to healthcare and an ageing population) that are becoming unaffordable as productivity growth stagnates.
Last week, in a blog, I talked about the size of the British state. I looked at the changing shape of the Government, the decline in the size of Local Government and the considerable growth in headcount at Non-Departmental Public Bodies, better known as quangos (such as the BBC, Network Rail, and NHS etc). I looked at the frustrating lack of public sector productivity growth. Despite the private sector producing more per unit of input over time, the public sector doesn’t yield the same gains. Part of the problem is related to the increased complexity of UK legislation (if not its total volume) which inevitably demands more people governing its application. For instance, the tax code has increased in length demanding meaning more tax inspectors in HMRC, the Food Standards Agency has increased in size by 25% in 10 years reflecting the increased burden of food regulation, and of course the NHS has grown with the changing nature of provision (more middle managers) and it’s increased regulation (more lawyers and HR professionals).
The changing shape of our bureaucracy is part of a broader change in the shape of public spending. Government isn’t just about departments, civil servants and quangos, the Government spends about £1.2 trillion per year, a lot of which is flushed through our welfare state. Only about half of the UK’s total budget is spent on ‘public services’ (g.g. the NHS, schools, police and prison budgets). Getting a grip over the size of Government requires an understanding of its ‘redistributive nature’.
“One pound in every ten created in the UK economy is taken from us and given back to us in cash.”
There are four fiscal periods in the 65 years before the Covid-19 pandemic. Post-war expansion saw the size of the state increase by one-third (equivalent to one-tenth the size of the entire British economy). This reflected the creation of our social safety net (via the National Health Service Act 1946 and National Insurance Act 1946) as well as the expansion of public education to secondary school pupils (via the Butler Act in 1944). But it was also a consequence of costs of nationalisation, wage and price controls that were synonymous with post-war economic planning in Britain. Public Spending fell between 1975 to 2000. This was due to cuts in spending and privatisation of nationalised industries but also periods of robust economic growth during the late 80s and late 90s.
Despite New Labour being built around the promise of fiscal rectitude and responsibility, the noughties were a time of increased spending on social infrastructure (schools and hospitals), a lot of via expensive Private Finance Initiatives, as well as expanding the availability of tax credits for working families. Spending exploded during the Global Financial Crisis, and the subsequent policy decision to recapitalize large parts of the British banking sector. The Coalition’s austerity agenda then brought public spending back to a long term average of less than 40% by the end of the decade in 2019/20.
That legacy was destroyed by the Covid-19 pandemic which demanded huge increases in public spending for furlough and business support schemes (The total cost of Covid-19 for Government is estimated to be potentially as high as £410 billion - equivalent to £6,100 per person in the UK).
As of fiscal year 2022/23 total managed expenditure is £1.2 trillion, equivalent to 45% of GDP (which is, as evidenced on the chart above, above average historically). In real terms this is almost a 6-fold increase on total spending in the mid-50s. And in terms of total spending per head of population, we have gone form spending (in 2022/23 prices) approximately £3,854 per head in 1955/56 to £17,100 today.
Why has public spending gone up?
There have been a lot of changes to the shape and nature of public expenditure in the last 50 years. Since the end of the Cold War there has been reduced pressure on military spending. Military pursuits in the Middle East were never as expensive and have now come to an end. Military spending has fallen from 20% of total Government spending to about 5% (Paul Johnson, Follow the Money). Today we spend just 2% of GDP on defence.
Other factors include the fact the Government doesn’t build public housing on the scale that it used to. Nor does the Government own and operate large industries. Low borrowing costs (until very recently) have also kept debt interest payments low, putting downward pressure on our budget.
What has pushed up public spending in the post-Cod War period has been the steady growth in size and reach of our social safety net. In the UK this has come in the form of support for low income households via the welfare system, healthcare, adult social care (including disability benefits) and finally pensions for people in retirement. This is the modern incarnation of William Beveridge’s vision of a system that supports people from ‘cradle to grave’, as conceived in his report to parliament, the Social Insurance and Allied Services report (more commonly known as the Beveridge Report).
In 2022/23 we spent:
£108billion on working-age welfare (of which about £15 billion is spent on housing benefit).
£135 billion on pensioners (of which £110 billion is via the State Pension)
£66 billion on Adult Social Care and Disability Welfare
£180 billion on healthcare (NHS England ate up £153 billion)
In total, approximately £489 billion, 40% of public spending is in these four areas. The growth in ‘welfare spending’ has displaced the military spending . In real terms (2018 £s) 1950’s defence spending was more than healthcare, welfare and pensions combined. Today the combined budgets of these social priorities are nearly 10x the deprioritised defence budget.
This is not to say that spending in other areas haven’t increased too. Spending on education (measured as spend - £ - per pupil) went up between the early 80s and 2010, although has flatlined somewhat since then. Police budgets follow a similar trend, real terms increases up to the Coalition years, since which they’ve remained at the same level. As a percentage of GDP it is approximately the same today as it was 20 years ago. In real terms transport spending has increased but as a share of total spending it remains below where it was.
These comparatively modest increases in expenditure means that, as a percentage of the total spending, education has fallen from 12% of total spending in 1990 to 9% today, police and criminal justice from 5% to 4%, and defence from 12% to 5%.
This partly sums up ‘austerity’, some budgets did well, others did not. Spending on health, foreign aid, and pension entitlements grew. Budgets devolved to local Government faired poorly.
But it is wrong to suggest that austerity was a deep adn destabilising cut to public spending. In only 3 of the 10 years between 2010 and the pandemic were there real spending cuts to the budget. In every year that George Osborne was Chancellor of the Exchequer, public spending was higher as a percentage of GDP than it ever was when Gordon Brown had the same role between 1997-2007.
International comparisons
By international measures, the United Kingdom isn’t a profligate spender. We spend less as a percentage of our GDP than most of European counterparts - Germany, France, Italy, Sweden, Spain and Denmark. However we spend more than our transatlantic competitors Canada, the US and Mexico. Marginally more than trading partners in Australia, Japan, and China. And we spend much much more than the fast growing dynamic economies of India, South Korea and Singapore.
It’s easy to explain some of these parallels. The US economy is huge and large chunks of its healthcare system were privately funded. The same is even more so for South Korea. India and Singapore also have less developed social safety nets. While European Countries (Germany, France, Sweden, Spain etc) have extraordinarily generous welfare states.
Is this affordable?
The big question is whether this is all affordable. And the quick answer is not if your long term tax receipts can’t meet your outgoing expenditure, because borrowing inevitably becomes more expensive (as we say during Liz truss’s time in Number 10). Unless the economy grows, tax receipts don’t grow, and we increasingly rely on capital markets to fund our spending commitments.
First off, the OBR release a table looking at the cost to taxpayers from borrowing. We currently spend over £111 billion (nearly 10% of the total public sector spending budget) on debt interest. This is expected to increase by more than 10% in the next 6 years, to £122.5 billion . A huge portion of this will be associated with the issuance of new gilts.
To reuse my 4 periods of fiscal history above, there are only two periods in our debt history - one where we could afford to spend more and saw net-debt fall (as a percentage of GDP) and the period from the early 90s onwards when we could not. If you overlay this with a chart displaying productivity growth, it is clear that as productivity slowed down towards the end of the 20th century dipping below a 10-year average of 2%, so debt to GDP started to rise.
Conclusion
Our society is far richer, more equitable and equal than it has been at any point in history. Part of the reason has been the acceleration in globalisation and free trade that has ushered in a long period of economic growth in the post-war period. The other reason has been the growth of our welfare state (across the Western World).
Both of these blogs have tried to dissect quickly and in an easy-to-understand manner, the size of our public sector. Criticism that we spend too much on a bloated bureaucracy are common place in political discourse. What is abundantly clear is that large bureaucracies and high spending Government’s are not unique to Britain. Most G7 country’s spending patterns have moved in a similar direction.
But that doesn’t detract form the fact that Britain finds itself with huge spending commitments, an increasingly unproductive economy, and a increasingly bloated public sector that is governed by a more complex legislative framework than at any point in our history. And this is before we take a fair look at the quality of our public services in recent years - have health outcomes improved? Are children leaving school ready for the world? Is the criminal justice system effectively reducing the risk of crime? Does our transport system help or hinder the flow of people around the country?