17 November 2022

Inflation is one thing, but don’t forget Britain’s ‘cost of government crisis’

By Dr Mike Jones

As Jeremy Hunt prepares to deliver today’s Autumn Statement, the UK’s cost of government crisis has never looked more acute. While much is made of fiscal ‘black holes’ and the need to raise taxes, far too little attention is paid to the scale of existing government spending.

Just take a look at the figures for the coming years. In 2022-23, public spending is projected to rise to £1.09 trillion. That’s a one with twelve digits after it: £1,090,000,000,000. It amounts to £39,000 per household per year, or £750 a week.

The really alarming thing is that this is happening in 2022 – more than 10 years after George Osborne set up the Office for Budget Responsibility (OBR) to help keep excessive spending in check. To put things in their historical context, at the turn of the century, government spending accounted for 35% of our national income. Gordon Brown, in his early years as Chancellor, followed Conservative spending plans and brought public expenditure down to where it had been when Margaret Thatcher left office in 1990. Today, however, public spending is close to 45% of national income, higher than when James Callaghan left office in 1979 and comparable to the years following the 1973 oil crisis.

The failure to get a grip has created a cost of government crisis, with taxes ratcheting ever upwards and the sheer size of the state dampening growth and weakening the public finances. This might be excusable if we were getting world-class public services, but the quality of our health and education still leaves much to be desired. All the while, the higher taxes we shell out to fund those services have started to seriously undermine economic efficiency.

While most government spending is done with good intentions, the simple fact is that those in charge of the purse-strings have less incentive to minimise their costs than their peers in the private sector. No one has made this point more convincingly and thoughtfully than IMF economist Vito Tanzi, a leading expert in public finance. Tanzi has found that extra spending ceases to contribute to increased human development beyond 35% of GDP. That should be seen as the maximum justifiable level of public spending.

It is not easy for the Conservatives to admit this, or at any rate to emphasise it, but the Thatcher mission to ‘roll back the frontiers of the state’ has been undone. True, the period of austerity under the Coalition – so decried by Boris Johnson – did see spending back down below 40% of GDP, the level it was at the tail end of the Blair years. But after Johnson became Prime Minister, the spending taps were turned on again, and the pandemic saw the largest single increase in public spending in our peacetime history.

That’s how we’ve arrived where we are today, with spending as a percentage of national income higher than it was during the Winter of Discontent. The OBR estimates that public spending will not return to pre-Covid levels at least until after 2026-2027. In other words, the cost of government crisis is set to continue for years to come.

On Thursday, self-proclaimed Thatcherite Rishi Sunak could chart a different course. The spectre of inflation will depress budgets in real terms, but sluggish GDP growth is unlikely to help his spending-to-GDP ratio. Bold action to cut spending will be needed. We at the TaxPayers’ Alliance have plenty of ideas: scrap wasteful quangos like the Arts Council, rein in unnecessary benefits and stand their ground on public sector pay and headcount reductions. None of this will be easy, but it is necessary.

If Chancellor Jeremy Hunt does not use the Autumn Statement to press the reset button, taxpayers will face a higher burden for years to come, the Conservatives will have helped roll back the Thatcher revolution – and ministers may never again have the political space to address the cost of government crisis.

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Dr Mike Jones is a researcher at the TaxPayers’ Alliance

Columns are the author's own opinion and do not necessarily reflect the views of CapX.