Is government expenditure really what it seems in the UK? How much difference has there been between times of austerity and times of big investment? Colin and Carole Talbot explore the reality of this divisive issue in British politics.
For almost half a century, since the oil-crisis caused recession and public finance crisis of the mid-1970s, a central issue in British politics and policy has been the amount the Government spends. Debates have raged over the size of Government and public spending has been a central part of those controversies.
On two occasions – 1976 and 2008 – controversies over public sending have proved pivotal in the development of British politics.
The 1976 “IMF Crisis” occurred as a direct consequence of the international oil-price crunch of 1974, which severely damaged western economies. The resulting problems with the UK’s public finances caused Jim Callaghan’s Labour Government to go to the IMF for a loan of $3.9bn ($16.8bn in 2016 prices). The political fall-out within Labour and the so-called “winter of discontent” in 1978 almost certainly led to the election of Margaret Thatcher in 1979.
The 2008 ‘global financial crisis’ is much more recent and well known. Depending on your point of view, the New Labour governments public spending prior to the crisis was either a cause (as the subsequent Conservative-Liberal Democrat coalition claimed) or was a consequential problem.
The Rise of Public Spending
Public spending – as a proportion of national wealth creation – increased rapidly from the later years of the 19th century and by 1960 it was more than triple what it had been around 1870.
There are many theories as to why this happened – from the rise of the ‘welfare state’ to the rise of a ‘warfare state’. Some explanations have focussed on the UK and its political history.
However if we look at the “G7” group of highly industrialized big democracies we see a roughly similar pattern for all of them regardless of their very varied political histories over the ‘long twentieth century’.
There are important variations, but the broad pattern is strikingly similar?
We started by pointing out that specific debates about the size of government spending in the UK started around the time of the 1974 oil and 1976 IMF crises. Since then there has been a cacophony of debate about the subject. But has all the light and heat signified anything?
The answer is a lot less than is usually supposed.
The next diagram – based on HM Treasury and the OBRs figures – shows public spending trends (as a % of GDP) since 1965-66 and up to 2023-24. (Obviously, forward figures are projections).
What is striking about this is the lack of really qualitative, large scale, change. Unlike the 90 years between 1870 and the 1960s when public spending grew threefold, in the 60 years since the mid-60s it has oscillated around an average of around 40%**.
Most of the big deviations from the average are due to big economic changes (the 1970s oil crisis, the 2008 GFC, etc). Sometimes these are combined with strategic policy decisions about spending. But the overall effect, when viewed from this very high-level long-term perspective, is remarkable.
This picture – and the previous one showing the growth in public spending across the G7 in the earlier period – raise important questions about the political-economy of what some call ‘late capitalism’. They also raise serious issues about some of narratives that have been proposed about the so-called “neo-liberal” period since the mid-1970s?
It is only when a much more close-up look at some of the variations is taken that more traditional political and policy controversies come into focus.
If we truncate the Y-axis on our data to illuminate the deviations from the average (as in the above diagram) some of the more well-known political debates come into focus – but not always as expected.
So, for example, common stories about the last half century would suggest that the ‘Thatcherite Revolution’, aimed at ‘rolling back the frontiers of the state’ should have been a low spending Government. Similarly their successors in New Labour were ‘high spending’ and the most recent Coalition and Conservative governments ‘low’. In fact all three had roughly the same average spending.
Even the trends are arguable. Whilst it’s clear the Thatcher/Major governments did eventually get spending on a downward path it was a struggle. Similarly, New Labour’s spending pattern is more complex than a simplistic ‘high spending’ narrative. After a short period of continued shrinkage they did indeed grow spending a lot more between 1999-2005 – but only up to the long-term average. After that they paused growth and the really big jump only took place after the GFC ‘hit’ in 2008.
And finally, the period of “austerity” since 2010 does look like it is leading to a sustained, but relatively small, permanent shrinking of public spending if current policies are continued.
There is a lot more to say about these numbers but we hope they illustrate its as important to look at the really big, and historical, trends as well as the short-term ‘sound and fury’.
This post comes out of research being conducted as part of Colin R Talbot and Carole L Talbot’s ‘Goldilocks Government’ project.
Author’s note: the figures in the first two diagrams are on a slightly different basis to the 3rd and 4th. Both are valid and it’s the trends that matter here.