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How much has government spending been cut?

Recent public finance statistics have suggested that the UK deficit has risen in the first seven months of the financial year 2014/15. The build up to the Autumn Statement has therefore seen much discussion about the likely upward revisions the Office for Budget Responsibility is going to make to estimates of the structural deficit. Ahead of the 2015 General Election, there is a real possibility that in order to hit a given structural deficit target, a future government will need to reduce spending or raise taxes by more than the 2014 Budget suggested was necessary.

When thinking about the feasibility and desirability of spending cuts in future, it is useful to have a good idea about what has happened to government spending so far in this Parliament. The figures we hear reported in the media often distort public understanding, however, by labelling slower increases in spending than those previously planned as ‘cuts’. The aim of this briefing is therefore to present simply and clearly what has happened to spending for the full financial years 2009/10 to 2013/14 in this Parliament. It does so by presenting data on each of the following in nominal terms, real terms, as a proportion of GDP and as a proportion of gross value added at factor cost:

  • Total managed expenditure (effectively total government spending)
  • Total managed expenditure excluding debt interest payments
  • Spending on ‘social protection’
  • Total managed expenditure excluding social protection and debt interest

Total managed expenditure

Total managed expenditure has increased over the course of this Parliament from £673.4 billion in 2009/10 to £714.3 billion in 2013/14 (up 6.1 per cent). In real terms, i.e. taking into account inflation using the GDP deflator, this represents a cut of 1.7 per cent of overall spending (HMT 2014a) - equivalent to a compound rate of spending cuts of just over 0.4 per cent per annum.

 

Figure 1: Nominal and real total managed expenditure index (2009/10 = 100)

As a proportion of GDP at market prices, this has meant a fall in total expenditure from 47.0 per cent of GDP in 2009/10 to 43.8 per cent in 2013/14; and as a proportion of Gross Value Added at factor cost, a fall from 52.9 per cent to 50.5 per cent (HMT 2014a; ONS 2014a). In other words, on this measure, government spending remains over 50 per cent of national income and has fallen as a proportion of national income by less than 2.5 percentage points.

 

Figure 2: Total managed expenditure as a proportion of GDP

 

Total managed expenditure excluding debt interest

Over the same period, there has been a significant increase in debt interest payments. Since debt interest payments do not represent funds diverted to government consumption or redistributive transfers, examining total managed expenditure excluding them can give a better indication of the spending restraint that has resulted from things government actually does.

On this measure, there has been a smaller increase in overall spending – an increase from £642.4 billion to £666.3 billion between 2009/10 and 2013/14 (3.7 per cent). In real terms spending excluding debt interest payments has been cut 3.9 per cent over the same period (1.0 per cent per annum).

 

Figure 3: Total managed expenditure excluding debt interest

 

As a proportion of GDP, total spending excluding debt interest payments has fallen from 44.8 per cent to 40.9 per cent. As a proportion of gross value added at factor cost, this represents a fall from 50.5 per cent to 47.1 per cent.

 

Figure 4: Total managed expenditure excluding debt interest as a proportion of GDP

 

Social protection spending

The government engages in a range of ‘social protection’ spending, most of which entails fiscal transfers between groups – i.e. spending on sickness and disability benefits, the old age pension, personal services for the old, the sick, certain families and the unemployed, and a range of other benefits including housing benefit, family benefits and tax credits (HMT 2014a). These are the components of spending most often labelled ‘the welfare state’ in colloquial parlance and make up 35 per cent of overall spending.

Spending on social protection increased in both nominal and real terms between 2009/10 and 2013/14. In nominal terms, the amount spent rose from £223.0 billion to £251.3 billion (up 12.7 per cent). In real terms, this represents an increase of 4.4 per cent: in other words, there has been no cut in social protection spending in real or nominal terms. This contrasts with the impression given, for example by Church Action on Poverty, who recently claimed ‘The safety net that was there to protect people is being eroded’. While one can argue over whether the priorities given to different types of social protection spending have been justified, it is impossible to argue that social protection spending has been savaged – indeed, it has risen.

 

Figure 5: Social protection spending index (2009/10 = 100)

 

As a proportion of GDP and gross value added at factor cost, this has seen social protection spending remain fairly stable. Social protection spending as a proportion of GDP has fallen slightly from 15.6 per cent to 15.4 per cent. As a proportion of gross value added at factor cost, there’s been a slight increase from 17.5 per cent to 17.8 per cent. Thus, despite falling unemployment, social protection spending has risen not only in real terms but as a proportion of national income.

 

Figure 6: Social protection spending as a proportion of GDP

 

Total managed expenditure excluding social protection and debt interest

It is sometimes said that we would expect ‘social protection’ spending to increase following an economic downturn – due to the ‘automatic stabilisers’ of increases to benefit expenditure induced by high unemployment and falling real wages. An ageing population also puts upward pressure on spending on the state pension and old age personal services. Therefore, it also interesting to examine what has happened to overall government spending stripping out both social protection and debt interest spending.

When you do this you find that residual expenditure has fallen from £419.4 billion to £415 billion between 2009/10 and 2013/14 – a nominal cut of 1 per cent and a real terms cut of 8.3 per cent.

 

Figure 7: Total managed expenditure excluding social protection and debt interest

 

As a proportion of GDP, this has seen remaining spending fall from 29.2 per cent to 25.5 per cent. As a proportion of gross value added at factor cost, this is a fall from 33.0 per cent to 29.3 per cent.

 

Figure 8: Total managed expenditure excluding social protection and debt interest as a proportion of GDP

 

Thus, by this measure it can be said that there have been substantial spending cuts. However, progress seemed to have stalled even prior to the increase in spending we have seen in 2014/15 so far. Furthermore, it is arguable whether this is a reasonable metric by which to think of ‘cuts’ in political discourse. Firstly, many of the objections to spending cuts relate to purported cuts in welfare spending which – on a wide definition of welfare, or social protection – are not happening (though, of course, there are pressures from an ageing population). Secondly, debt interest is a payment now for spending incurred the past. It is difficult to make the argument for a wider budget deficit on the grounds that spending has only risen because debt interest has risen given that such an increased budget deficit would simply lead to yet higher debt interest (and lower non-debt-interest spending) in the future.

 

References

HMT (2010) Spending Review 2010. London: HM Treasury.

HMT (2014a) HMT Public Expenditure Statistical Analyses (PESA). London: HM Treasury.

HMT (2014b) Budget 2014. London: HM Treasury.

OECD (2014) Economic Outlook No. 95. Paris: Organisation for Economic Co-operation and Development.

ONS (2014) United Kingdom National Accounts, The Blue Book, 2014 Edition. London: Office for National Statistics.

Smith, D. (2006) Living with Leviathan: Public Spending, Taxes and Economic Performance. London: Institute of Economic Affairs.

Comments (1)
Well done! A very useful exercise. It might be of interest to note that more than half of British government spending consisted of debt interest between 1818 and 1854. Ignoring it would have given a very misleading picture. And by the way we should always bear in mind that governments, as well as households, might find that if interest rates were to increase (as presumably they must some day) it would worsen their financial position considerably.

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As in all IEA publications, the views expressed in this blog are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.

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