Quantifying the continuing UK public spending squeeze

In the October budget, the Prime Minister increased his total GDP expenditure by 1.8% of GDP compared to his predecessor’s plans. In other words, the total public spending as a ratio of GDP remains fairly flat over the five-year forecast period. (Everyone who calls this a share of government spending in GDP is either sloppy or intentionally misleading.
[1]) As a result, the ratio is planned to be roughly located in 2029/30, the penultimate fiscal year for conservative government.

Just before my budget, I calculated that my spending on GDP should be about 3% higher than this. This meant bringing the provision of public services back to a level similar to that of the last year of the last labor government. However, the method I used to reach that number was based on an unfamiliar data source, so I thought it might be helpful to redo that calculation using a more familiar definition. This post does that.

What you can’t do, but many people do is look at the total ratio of government spending to GDP and draw conclusions from that. Such exercises always equate a certain level of this ratio with certain provisions of public services over the long term, but this is completely wrong. For example, total government spending includes interest paid by the government on debt, but it would be ridiculous to suggest that public services have improved since the pandemic, as interest rates on that debt have increased significantly. The ratio of total public spending to GDP was unchanged between 2007/8 and 2016/17. As a result, some say austerity in this period is a myth. Obviously, we need to see some decomposition.

Before doing so, it is worth noting that it is not easy to grasp the historical timelines where public spending is broken down into its components, such as the amounts received over time by departments. ONS I’ll publish it A very detailed breakdown by spending function, not as a chronological order, but for individual years. Thankfully, IFS does a lot of legwork hereand I draw this source extensively. Anyone who wants to avoid my analysis and jump to my conclusion can skip to text after the final table.

Even if we break down total expenditures into key components, it remains true that maintaining a portion of public expenditure as a constant percentage as part of GDP over the long term does not necessarily mean that the level of public regulations remains constant. This point can probably be most clearly created by noting that GDP tends to decline as it increases its share of food purchases in total GDP, but it is unsettling to report this by implying that people are starving as the economy grows. Two of the UK’s public spending items that showed the most clear trends of the past are health and defense. Here we have their stocks from the above IFS document over time.

Defence spending is now almost a quarter of that of 1955, reflecting both the abandonment of the role of the British empire and the end of the Cold War. Obviously, this doesn’t mean that people feel less safe than before. Health expenditures as a share of GDP have steadily risen over time for several reasons. This does not mean that we are healthy on average, in that it is because our population is getting older and we need more care, but rather our life expectancy is increasing. A clear example of this point is that while the proportion of GDP health spending has decreased slightly over the decade since 2010, treatment waiting times have increased much more dramatically, and the level of public health services has deteriorated significantly.

The chart below compares the ratios of public spending with or without health and defense spending, and they are very similar. But this is largely a coincidence, and the future looks very different, perhaps because both ratios need to rise in the future. As a result, from the beginning of the century when defence spending no longer declines, we should expect that the total public spending rate (and therefore the percentage of total GDP tax) to rise over time for a foreseeable future. I apologize for continuing on with this, but this basic point is rarely done in Mediamacro’s commentary.

Total UK public expenditure as a ratio of GDP including health and defense

Of course, health and defense are not the only areas of public spending where spending as a share of GDP can rise or fall over time, even if public regulations remain the same. Another example is the implication of the baby boom on education spending. However, the upward trend in health spending is so large that some analysis is needed. Most health clauses for this period are too low, and trendlines cannot be adapted to the data. Health expenditures are unlikely to be too high frequently. Because it’s painful to raise taxes to raise funds, but the conservative government has been squeezing its spending since 1979. In this blog post I tried to deal with this by looking at the total (public and private) health spending in other countries Using OECD Data.

Since the early 1970s, almost all OECD countries where data has been available have seen a significant upward trend in GDP share. This trend varies from country to country as expected, but the average across 19 OECD countries means that health spending on GDP increased by 0.11% each year, with a divisor number of countries increasing above and below this figure. (The UK number is 0.145%.) As pressure leading to this increase in ratio is common in most countries, it appears reasonable to use this 0.11% figure as a measure of the underlying trend in GDP share.

All that remains is when the UK’s health spending was sufficient. I chose 2010 because the waiting time for treatment was acceptable at this point. This allows us to measure spending gaps for other years and also helps us to move forward in assessing the validity of future plans. Of course, this approach is very rough and ready. It may also be possible to reduce this trend in the future by increasing the amount of preventive care (see discussion) here), but that does not occur when health is lacking, as treatment is always a priority.

Finally, using IFS data, we compared GDP shares and ratios across spending categories between 2007/8 and 2022/3. [2] The previous year was a useful reference point as it was before the economic recession following the financial crisis (a recession tends to increase spending in some regions) and is not affected by subsequent austerity. As mentioned previously, the current planned total spending ratio for 2029/30 is similar to 2022/3.

Components of public spending as share of GDP

The chart above suggests that health spending in 2022/3 was about 0.5% of GDP below about 0.5% of GDP than what is needed to replicate the supply level at the 2007/8 level. The actual regulations definitely got worse in 2022/3 due to a hangover from the pandemic. I hope that it has dissipated by 2029/30, but likewise, the upward trend underlying health spending means that spending should be slightly above 0.5% between 2022/3 and 2029/30. This account requires a total total of 1% higher in 2029/30 in 2029/30 to replicate only the expenditure level for 2007/8.

Turning to education, allowing a change in student numbers suggests that the 2022/3 public regulations were significantly below the 2007/8 level. This assessment appears to correspond almost to insufficiently regulated media coverage (see here

for example). Turning to other social security, The level of deep poverty on 3/2022 was similar to that of 8/2007however, it suggests another major decline in public provisions here. (2 children limit) You need to finish,for example. ) The current issues in public order and long-term care delivery are well documented. (here If we allow a public spending gap of about 0.5% of GDP in each of these four sectors, adding health means that a total public spending ratio is required in 2029/30 than the current plan to replicate the level of public spending provisions seen in the final year of the final labor government. [4]

The 3% gap is the same number as the one calculated before the budget using a rather different approach. An increase in defense spending share must be added to it. This analysis confirms that workers’ spending plans remain significantly insufficient if they aim to return public provisions to the level seen in the last year of the labour government.

Of course, the current plan is five years ahead, and it is possible that labor will be in power for a longer period of time. Public spending only increased significantly in the second term of the previous labour government. The political situation is similar and there are many reasons why it differs from that time. My more substantial concern is that the Prime Minister doesn’t show any indications of what was above that he did, but I’m happy if I’m wrong about this (with confidence) I can fix it. [5]

My analysis suggests that repeating Labour’s commitment in the main areas of taxes going to the next election is extremely stupid, but there is a great deal of political pressure to do so and I fear this government will succumb to those pressures. Here’s a nasty feedback loop. The more public service provision cannot improve significantly over the next few years, the more you will feel that more labor will need to make unrealistic tax pledges to win the next election. One way to avoid that was to increase the taxes in the last budget.

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[1] Calling this ratio a share means that the rest of GDP is a non-governmental share, not because the government’s total expenditure includes transfer payments.

[2] Data on overseas aid is from 2021/2, not from 3/2022.

[3] There are many areas of public spending that are not included in this list. For example, if you add up each column, you get 32.4% for 8/2007, and 40.3% of your total expenditure. The total spending ratio on March 2022 was 44.8%. Compared to 8/8/2007, interest on debt explains about half of this increase, but I would like to know that it explains the rest.

[4] The level of debt interest for 2029/30 is expected to be just below the 2022/3 level, reflecting the assumption that interest rates will not return to the level seen in the 2010s. If this turns out to be true, the higher the interest on debt, the higher the taxation, rather than a reduction in public spending. There is no reason for higher interest rates to shift voter preferences between public and private offerings, so saying other public spending should fall to suit higher debt interest is as ridiculous as saying that food spending should be reduced by this amount. Higher taxes allow additional debt interest costs to be spread across all areas of consumer spending.

[5] The attitude within the Ministry of Finance, particularly the belief that it is up to the department to assert increased spending, should not help here. Such an approach often eliminates the general overall framework and leads to outcomes that relate more to the personality of individual politicians than social needs and preferences.