Wednesday, October 27, 2010

Levels of Government Spending UK

Source: UK Public Spending

One note about graph. The level of government spending to GDP varies due to economic cycle. If there is an economic boom, then the level of spending to GDP is more likely to fall. Steep rises in the % government spending to GDP always occur in a recession. Because:
  1. GDP is falling
  2. autonomous fiscal spending on unemployment benefits.
This rise in Spending to GDP in a recession is to be expected and necessary to offset fall in private sector spending.

Source: UK Public Spending

In real terms, (adjusted for inflation) spending has been increasing constantly apart from the odd dip.

It was of the irony's of the Thatcher years (and Reagan years) that for all the rhetoric of 'rolling back the frontiers of the state, they never really reduced the size of the government.

The UK has seen the government's share of GDP fluctuate from between 35% and 45%, but, around this average, it has stayed fairly constant since the second world war.

Away from the impact of spending cuts on economic growth. How much should UK government be spending? If the economy was strong, should we be seeking to cut government spending?

You could easily write a book and still have more to write. I (try) to take a non-dogmatic approach to government spending. You can't label government spending as 'good' or 'bad'. It depends on what and how it is targetted. It can be good if it is used in the right way it can also be inefficient and distort economic behaviour.

Some Areas of Concern
  • When Beveridge wrote his highly popular and influential report in 1942. He never envisaged a welfare state that paid benefits to 5 million adults. The Welfare state was supposed to be a safety net, for those temporarily out of work or incapacitated not a long term support net for such a high % of the working population.
  • The pension age was set in 1925 (History of UK pensions). Since then life expectancy has risen making a higher % of people entitled to pensions. Can society support an increasing % of population in retirement?
  • Public Goods. There are many essential goods and services that are either underprovided or not provided at all in the free market. These involve long term investment in transport, education, communication. Left to the free market, there would be a socially inefficient allocation. This is the kind of government spending that can improve economic welfare, if properly targetted.

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