Once again, a new Tory Prime Minister and Chancellor are banging on about the need for a smaller state. The modern-day reality is that this is pure fantasy. If public spending as a proportion of GDP is used as a bench mark, then as the charts below show, the UK has continued to fall well below European averages. Instead, the mix of public and private sector spending in the UK reflects US levels, which until Biden’s expansionary fiscal policies have generally remained below 40%.
During the post -war period as a result of increasing responsibility for providing welfare services, state spending grew significantly. In the 1970s it still remained above 45%, but during the Thatcher years, largely because of a massive privatisation programme it fell to around 35%. With the economy also growing consistently, New Labour presided over large increases in public spending, both as a percentage of GDP but also in real terms.
Having to provide extensive support to the financial sector as a result of the 2008 banking crash as well as having to provide increasing employment support, Labour left office with the state contributing over 50% of all spending. Labour’s ‘mismanagement’ of public finance was used (successfully) by George Osborne as cover for an ‘austerity’ programme centred on cutting public spending. Yet despite this, the state didn’t really shrink like Osborne and the neo-liberal Tories wanted it to.
By the time Boris Johnson (a maverick when it came to spending issues, but in continued conflict with a ‘small state’ Chancellor) became PM the ratio remained at around 40%. Then, as the first chart indicates, the Covid-19 pandemic resulted in very high levels of emergency public spending – with the cost of Government measures estimated to be over £400 billion, the equivalent of about £4,600 to £6,100 per person in the UK. Official figures show that spending in 2020/21 was about £167 billion higher than had been planned before the pandemic for that year. Yet without this a major economic downturn would have been almost inevitable. Today, forced to spend billions on the energy crisis and to prevent another economic collapse (it’s very likely that the economy is already in recession) the new government can’t stop public spending rocketing again.
The state we’re in
Yet the current pressures on government spending aren’t just the result of further ‘external shocks’. Even though it might not want it to be, around 40% of government spending goes on pensions and. health care – the result of an ‘ageing’ population. In contrast, education spending now makes up only about 10%, well below that needed to fund Boris Johnson’s ‘skills agenda’ and resulting in universities pushing further costs onto students. Even Defence spending, much loved by Truss and the Tory right has been slashed. According to critics, Truss’s commitment to a ‘war on Whitehall waste’ would generate less than half a billion pounds in extra revenue.
Unlike other European countries the UK state, particularly when the Tories have been in power, has played a marginal role in leading investment and promoting economic growth and there has rarely been anything resembling an ‘industrial strategy’. While the Tories are still officially committed to a greening the economy and alternative forms of energy (though, so far Truss has barely mentioned either) they’ll rely on market forces and the private sector to drive this. Likewise, the NHS will have to depend on private funding even to keep going.
But if they find it hard to control state spending, the Tories are likely to press ahead with further deregulation measures. Ditching any outstanding EU protection, tightening anti-trade union laws and of course removing the cap on bank bonuses.
Even if the Tories wanted to expand the state, they’d be hampered by an attachment to a neo-liberal economic framework which restricts levels of government borrowing and gives the Bank of England autonomy over large areas of economic management. In many respects Labour is also hamstrung. Watching the Tories adopting its own policies for subsidising energy, it contents itself with asking questions about ‘how its going to be paid for’ and watching how ‘the markets’ will respond. But at the moment attention will focus on this weeks ‘mini-budget’ and Truss and Kwarteng’s ‘trickle down’ economics, long discredited even by many right- wing economists.