A United Kingdom spending update

by on January 27, 2013 at 2:53 pm in Current Affairs, Economics | Permalink

Remarkably, public spending actually went up last year as a share of our national income, according to a devastating analysis by the OECD.

In a spreadsheet buried deep on its website and annexed to its latest Economic Outlook, it says that public spending hit 49pc of UK GDP last year, a shocking increase on the 48.6pc of GDP spent by the state in 2011.

You should note that differing figures from the UK government show somewhat of a decline in spending in real terms, unlike this estimate.  It would be interesting to read a detailed explanation of why the OECD figures differ.

I would also note that, according to these estimates, UK public spending was 36.6% of gdp in 2000, and had edged up over 50% by 2009 and 2010 and now is still in the range of 49% or so.  Most of the run-up came over the bubbly years of 2000-2006.  Let’s start by calling that an unsustainable mistake.  I would say that, looking back, they didn’t get very much for this spending boost, did they?  That’s fact #1 that should start off any analysis of British fiscal policy looking forward.

Take a look at the recent sectoral details.  Public investment in varying forms is way down, and benefits and public pensions are way up.  It is correct to note that the decline in public investment, and its deleterious consequences.  It is also correct to see the British budget as illustrating David Brooks’s thesis — seconded by many conservatives — that benefits are eating our future.

Maybe I can forestall some of the usual objections to my UK posts simply by noting there are many different ways to measure austerity, and if you use the word in a particular way (“the UK should have had more public investment given its place in the business cycle”), you can claim the UK had austerity relative to that ideal.  Plus taxes went up a lot, most of all the VAT.

Still, these numbers should be put on the table.  Instead, I very often see these numbers being swept under the proverbial rug.  Perhaps it is believed they might confuse people.

dearieme January 27, 2013 at 3:28 pm

” Let’s start by calling that an unsustainable mistake.” Waddya mean, mistake? They won two elections, didn’t they? The bastards.

JCW January 27, 2013 at 3:53 pm

“Most of the run-up came over the bubbly years of 2000-2006.”

What was the run-up spent on? Military spending in Afghanistan and Iraq? An aging population collecting more pensions and benefits relative to the taxpaying workforce? Rising health care prices? New paint for every bus in London? The queen’s corgis?

The answer to that question is fairly important if you want to determine whether or not the Brits “got very much” for the spending boost, given that “very much,” in a political system, is measured in part by non-monetary criteria.

Hoover January 27, 2013 at 5:29 pm

I wonder if our American friends discussing the enormous problems of the UK economy are aware of the scale of the damage Labour did. Most Brits are unable to comprehend it, so I doubt foreigners would be able to.

There were wasteful projects, such as the 12 billion IT system for the health service. Here’s an account of 26 billion wasted on IT: http://www.independent.co.uk/news/uk/politics/labours-computer-blunders-cost-16326bn-1871967.html

6 billion wasted on defence contracts: http://www.telegraph.co.uk/news/politics/9001510/Government-wastes-31bn-on-rip-off-contracts.html

The list of pointless projects is endless. It eventually piles up in the mind and makes the stomach churn. It was misallocation of resources on an epic scale.

I won’t claim innocence: I was hired as a contractor for the Dept of Education and effectively did data entry at 44k a year (about 69,000 dollars) on a website that nobody used. I was rightly fired when the tories arrived. This pointless work did however teach me the magical way prices focus firms on producing things people want, and the awful effect of not having prices to tell you what to do.

It’s two years since Labour were banished and the truth still creeps out month after month. This weekend we hear that Labour paid far too much for taking on the failing banks, and we’re now looking at a loss of 18 billion for our position in RBS and Northern Rock.

Most overseas commentators are puzzled as to why the UK economy is still in trouble. With my experiences, it makes perfect sense to me.

Jeremy Poynton January 28, 2013 at 9:43 am

Not to mention the huge fines what we the taxpayer will be picking up on behalf of RBS.

One thing we do know, and that is that nobody who was responsible for this disaster has been affected by it. The rest of us, on the other hand, have been subjected to the greatest shakedown in history, and there is no sight of an ending to it at all.

@Sam January 28, 2013 at 12:55 am

No – Brown spent it trying to put in place his client state, that was to be the 1000 Year New Labour Reich.

Sam January 28, 2013 at 12:55 am

What was the run-up spent on?

Brown frittered it away on nonsense.

mulp January 28, 2013 at 3:22 am

Yup. two wars that have had a negative effect globally on economic stability, hitting the UK with the double whammy of needing to pay bribes to keep opposition to the wars from causing crisis – “we can spend rebuilding the schools and hospitals of people who hate us while our schools and hospitals are in decay??” and pay for the wars, which were driving up commodity costs.

Tame January 28, 2013 at 5:39 am

As military expenditure as a %GDP went from 2.39% in the year 2000 to 2.67% in 2009. It could hardly explain the increase in government spending as a % of GDP that Tyler is trying to highlight.

dan1111 January 28, 2013 at 6:47 am

Yes, but unlike most of the spending, it can be blamed on conservatives. Hence the excessive focus on it.

Dan Collins January 28, 2013 at 11:46 am

How can it be blamed on conservatives, Dan1111? Labout were in power throughout that period. (I take your point, of course.)

dan1111 January 28, 2013 at 12:19 pm

Dan, note the small c. I was thinking of the American conservatives who started the wars.

zaoem January 27, 2013 at 4:31 pm

If spending/GDP is a measure of a “spending boost” since it can go up if GDP goes down.

Ray Lopez January 27, 2013 at 6:21 pm

@zaoem, yes, I was going to say the same thing. It’s all confusing, since ratios are used and during the Great Recession nominal GDP went down. Here is what the OECD says from the 3rd link (heraldscotland): ” As recently as 2000, according to the most recent Economic Outlook of the OECD, public spending in the UK took only 36.6% of Gross Domestic Product, and was almost totally covered by tax revenues. Then Gordon Brown turned on the taps of borrowing to raise spending to 44% of an expanded GDP in 2006. This was no more than a debt-fuelled mirage. But public spending growth is easier to start, stop and reverse when boom turns to bust. Today it stands at 49% of GDP, having peaked at 50.2% in 2010.”. So, do the math, using this site: http://www.tradingeconomics.com/united-kingdom/gross-national-product : 37% 2000; 44% 2006, 50.2% 2010 (when nominal GDP was less than 2008 but greater than 2006); 49% today (when nominal GDP is at an all time high). I think the confusion is this: people confuse nominal GDP with potential GDP (in their mind’s eye) and with unemployment (which is related to potential GDP depending on what NAIRU you think is real). Speaking as a non-economist.

Peter Schaeffer January 27, 2013 at 8:13 pm

RL,

I wouldn’t trust Trading Economic. I am not saying that their number are wrong in this case. However, I would never treat them as definitive. A few suggestions.

IMF WEO Database
World Bank statistics
UNSTATS
UK National Statistics
Eurostat

Rahul2 January 27, 2013 at 4:32 pm

One of the links informs us that public sector spending was 36.6% of GDP in 2000, 44% of GDP in 2006 and 50% of GDP in 2010. Given the 2007 financial crisis, the real counter-cyclical increase here was from 36.6% to 44%. Possibly that is unsustainable and beyond some Rolls Royce public services (when a Ford would do), it is difficult to see what that money bought. I don’t think any one of the austerity critics (Wolf, Portes, Krugman etc.) would argue with this point. They just don’t want to see austerity now.

On the sectoral figures roughly £215B is welfare + social security (add HMRC which is tax credits + welfare). This can be split into roughly £100B in social security and £115B on the rest. Not sure what the comparative #s are for other OECD countries but context needs to be taken into account. Health is another £106B which is probably good value for money as there is little private health spending. Education another £60B. So all in, ‘benefits related stuff is £400B of the govts. £694B spend or approx 29% of GDP. That seems high.

Jim January 27, 2013 at 6:04 pm

Healthcare and education are ‘benefits related stuff’ now?

Dan Collins January 28, 2013 at 11:51 am

Rahul2 – ‘ I don’t think any one of the austerity critics (Wolf, Portes, Krugman etc.) would argue with this point. They just don’t want to see austerity now. ‘

But they NEVER want to see austerity, if by austerity you mean reduced state spending.
Some of us were calling for the state to cut during the (obviously unsustainable) bubble years, but they kept the money tap open.
As a socially liberal, small state conservative, I want to see a cultural change – that, for me, is the point of austerity now (which we don’t actually have in the UK).
As as result, I would like to see state spending cut by 50%, and hang the economic consequences, which I think would be deep and violent but relatively short lived.
This is the opposite of the Labour approach, which is culturally to accomodate the country to permanent higher spending.

Brian M January 27, 2013 at 5:54 pm

David Brooks’ “thesis” is “if I present this linear projection in a provocative enough way, people will pay me money to hear it.”

UKGB January 27, 2013 at 6:01 pm

HI Tyler

A few points:

1. Year 2000 was the bottom point for the UK in terms of public sector austerity. After about 8 years of it (Brown inherited and kept to the Conservative plans) you would generally have got a positive answer to the question “should taxes rise to pay for better public services?” Blair committed to matching European levels of public health spending, and raised it over time from 4% of GDP to 8%, I think. Public satisfaction in the NHS rose to an all time high. Try to compare the UK health/spending outcomes to the US’s and try not to blush

2. As Zaoem points out, look to the denominator. The big lift off from 43% to 50% is all pretty much the recession. Benefits levels may have risen, but the UK does not have an internationally crazy level of benefits – google “replacement ratio” http://euwelfarestates.blogspot.co.uk/2012/04/world-ranking-in-unemployment-benefit.html

3. You are straightforwardly wrong about “not getting much” – or rather I think you need to put in slightly more research about what the public sector outcomes were like in year 2000. Across quite a wide variety of areas the UK performance improved in a fairly predictable way. Not just health, but spending more on education did increase performance too, though not as much as if they had been more wholehearted in terms of structural reform. And tax credits did have a measurable effect on poverty.

4. Pensions got linked to earnings rather than wages in the early to mid 1990s and stayed there – that explains quite a lot. Is the benefits bill high compared to other developed nations? Curious to know. But we have a higher retirement age … .

Millian January 27, 2013 at 6:11 pm

The NHS has been more cost-efficient at other times, too, and raising spending from 4% to 8% of GDP will hardly double healthcare outcomes. The marginal effects of basic provision of clinics and hospitals in the first 1% of spending per GDP can’t be repeated in the last 1%, for instance. And for the growth in G/GDP effect to be caused by “pretty much all the recession”, i.e. GDP, then growth since 2006 would have to be approximately -14%, in total. GDP growth since 2006 is approximately 0%.

Peter Schaeffer January 27, 2013 at 8:18 pm

“Blair committed to matching European levels of public health spending, and raised it over time from 4% of GDP to 8%, I think.”

Public health care spending was 5.5% of GDP in 2000 and 7.2% of GDP in 2008. See http://www.guardian.co.uk/news/datablog/2012/may/02/uk-healthcare-spending-gdp. Note that total health care spending in the UK (public and private) is around 10% of GDP (up from 6.6% of GDP in 1997).

UKGB January 28, 2013 at 7:18 am

Sorry it was late and I didn’t have data but thank you Peter Schaeffer.

And this was the result: http://www.kingsfund.org.uk/projects/bsa-survey-results-2011/satisfaction-nhs-overall-results-1

The rest of the debate seems to have gone down a cul-de-sac that Tyler did not intend: the fiscal policy boosts the economy or does it cul-de-sac. In 2000-7 it had no effect at the macro level because monetary policy had traction. The target is now wrong.

But I stick by my general point: Tyler has been sloppy and it is wrong of him to call his assertion “fact#1″. It is not a fact that we got nothing for that public spending boost. At the very least a lot of poor people received a cash transfer. At the most, a host of public services improved, and some important investments were made (look at what the science budget did). Sloppy.

Millian January 28, 2013 at 11:37 am

Does the NHS exist to generate satisfaction with the NHS, or to generate health outcomes?

Dan Collins January 28, 2013 at 11:53 am

Millian, the NHS exists for the following reasons, in declining order of importance:
1. To provide politicians with a sacred cow of a rallying point to assist with their re-election.
2. To provide a million Britons with jobs.
3. To provide health care.

Jim January 27, 2013 at 6:09 pm

The OECD data Tyler linked to shows that the Blair government reduced public spending to 36.6% of GDP in 2000, from the 43.5% it had reached in 1995 under that well-known socialist spendthrift John Major. And as UKGB explains, we did actually get something in return for the increased spending between 2000 and 2007, contra Tyler’s evidence-free assertions. The rest is the recession.

Millian January 27, 2013 at 6:13 pm

It would be more accurate to say that public spending was held stable in 1995-2000 despite rises in GDP, rather than saying public spending was reduced. UKGB did not explain the outcomes to public spending, so this is an ironic point for someone else who is complaining about “evidence-free assertions”.

TMC January 27, 2013 at 7:21 pm

Sounds like he rode the same internet bubble we did up to 2000.

Dan Collins January 28, 2013 at 11:55 am

Jim – ‘under that well-known socialist spendthrift John Major’

He was not a socialist, but – like ever British politician in my lifetime, and possibly ever – he was certainly a spendthrift.

libert January 27, 2013 at 8:17 pm

Doesn’t the fact that spending as a share of GDP increased suggest that the spending multiplier is greater than 1? Full proof below:


Assume the null hypothesis that the spending multiplier is less than one. Namely, dGDP/dG < 1

If the null is true, then a reduction in G of X will cause a reduction of GDP by aX where a<1: (G-x)/(GDP-ax). Since a G/GDP.

Therefore our null hypothesis is false, leading us to conclude that the spending multiplier is greater than one.

We observe that

libert January 27, 2013 at 10:07 pm

Well something got screwed up. It should say this:

– Assume the null hypothesis that the spending multiplier is less than one. Namely, dGDP/dG < 1

If the null is true, then a reduction in G of x will cause a reduction of GDP by ax where a<1. Then, the ratio of G to GDP becomes (G-x)/(GDP-ax), which must be less than G/GDP since a<1. But we observe that the ratio after the cuts [(G-x)/(GDP-ax)] is greater than the ratio before the cuts [G/GDP]. This refutes our null hypothesis, leading us to conclude that the spending multiplier is greater than or equal to one.

Millian January 28, 2013 at 4:23 am

… ceteris paribus.

dan1111 January 28, 2013 at 6:55 am

This proof is great, if one is willing to accept its premise: that government spending is the only thing that has an effect on GDP!

Dan Collins January 28, 2013 at 11:56 am

Libert – ‘the spending multiplier is greater than or equal to one.’

So what is the multiplier if I spend my own money myself, rather than give it to the government to waste on badly-negotiated IT projects and MoD contracts?

John January 27, 2013 at 9:38 pm

I have to say that this comment justifies a new designation—a low information blogger.

Or, Prof. Tyler have a very poor memory.

The following appear to be the facts:

The United Kingdom’s (UK) current account deficit was £20.8 billion in the second quarter of 2012, up from a revised deficit of £15.4 billion in the previous quarter.
The trade deficit widened to £10.1 billion in the second quarter of 2012, up from £8.1 billion in the previous quarter.

It seems that Prof. Tyler has already forgotten the wisdom of Michael Pettis, The Great Rebalancing

There is only one way for GB—stop imports. How else is it going to put people back to work?

dan1111 January 28, 2013 at 7:02 am

“It seems that Prof. Tyler has already forgotten the wisdom of Michael Pettis, The Great Rebalancing”.

If by “already forgotten” you mean “clearly didn’t subscribe to their theory when he reviewed the book yesterday”.

Beyond that, your argument amounts to “Tyler emphasizes some things, but I think we should emphasize other things.” But why are the figures you choose more important than the ones he used? Your position is not as self-evidently true as you seem to think it is.

John January 28, 2013 at 9:01 pm

dan1111, I didn’t assert that my figures were self-evidently true. I asked, How else?

I expect a long long period of dull silence from your keyboard as I am very confident you have no idea what GB should do.

are you guys all idiots? January 27, 2013 at 11:43 pm

A couple of PhDs in between all of you, everyone’s at least got a master’s degree form a non-substandard university and yet the level of discourse is abysmal. horrid.
guess what you idiot savants, if you wanted to you could run deficits of 10% of GDP for one or two terms and keep the economy booming whilst running into a full-blown disaster. apparently some of the fools on here would actually believe that this was sound economics. Get a grip or stop talking econ and head off to the nearest park and get drunk on cheap beer.

Nyongesa January 28, 2013 at 12:46 am

if you could apply your extraordinary intellect to critiquing specific arguments by specific people above it would help raise the quality of the discussion, for the rest us gorillas observing from the side lines, otherwise your comment, substantive as it’s single paragraph is, significantly contributes to the very thing you seem to abhor.

dan1111 January 28, 2013 at 7:09 am

+1 for a particularly non-substandard comment.

Dan Collins January 28, 2013 at 11:57 am

+2

John January 29, 2013 at 5:52 am

it seems you are a persistent low information commenter.

btw, Keynes was of the view that, given a persistent current account deficit, a national will experience a fall in income.

What has the last 6 years shown? countries with persistent current account deficits have not been able to regain employment, regardless of the size of their fiscal deficits, due to a lack of demand

Might not it be time to realize that such “lack of demand” is a reflection of the decline in income due to the persistent current account deficit?

JWatts January 28, 2013 at 10:29 am

“Get a grip or stop talking econ and head off to the nearest park and get drunk on cheap beer.”

You’ve got the wrong site. This is the site for people who prefer to go to the nearest park and eat high quality food with our cheap beer. Preferably we avoid parks with attractive females who may signal that only low quality food is available. ;)

Luis Enrique January 28, 2013 at 5:11 am

my guess is that the number to look at is public sector employment and, if it were possible to gather, data on private sector employment on public sector contracts, including construction projects. I reckon austerity does most harm when it translates into firing workers into a weak job market.

ThomasH January 28, 2013 at 6:31 am

Tyler’s comments, which are relevant for the US situation as well, imply that “spending” or “deficit” or even “investment” is too crude a way to look at budgeting. A recession changes the costs and benefits of all sorts of government taxes (the payroll tax) and expenditures (specific infrastructure projects, unemployment benefits, grants to states whose costs of borrowing does not rise in recession as does the Federal Government) in the direction of what in the aggregate looks like “fiscal stimulus,” althought not necessarily the stimulus we got in 2009.

Teddy Groves January 28, 2013 at 7:51 am

In this post another economist addresses the same issue from the opposite point of view: http://notthetreasuryview.blogspot.co.uk/2013/01/the-austerity-delusion.html?m=1

Bill January 28, 2013 at 8:47 am

+1 Good post.

Ralph January 28, 2013 at 10:15 pm

+2.

Brian Donohue January 28, 2013 at 1:31 pm

In the real world, ‘austerity’ means belt-tightening, spending less than you make, paying down debt.

To an economist in 2013, ‘austerity’ means the UK running only a $90 billion budget deficit.

Esoteric economics is becoming an ivory-tower talking shop like much of the rest of academia. Congratulations.

ralph January 28, 2013 at 10:05 pm

I just like the fact that Mr. Cowen went for a rough definition of “austerity” that I can work with. (although, ” claim the UK had austerity relative to that ideal” is a bit like saying you agree that I’m a jerk. :-) But, given that, the end result of “all that work” is that redistribution occurred — which you may not like — and benefits in trying times went up — which you may not like — but the question of what is sustainable or not is about the longer run balance of these items, not about a five-to-eight year run through extremely trying times. That said, however, it is entirely fair to target longer-term deficits and argue they have to be addressed. They do. There must be a plan to pay for them, or cut back costs to bring them into rough alignment. That’s true whether it’s the UK or the US. Brown may have or may not have made prudent investments on their own terms, but a good Keynesian would argue that during the boom times, he should have paid down the deficit if not the debt.

Merijn Knibbe January 29, 2013 at 3:05 am

Bill Mitchell has a blog about this, based upon the latest data which show the benificial effects of the Olympic spending boost and the dire consequences of the subsequent auserity (defined as a contraction of aggregate real spending): http://bilbo.economicoutlook.net/blog/?p=22527

And Eurostat has nice data about consumer spending: http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-13-002/EN/KS-SF-13-002-EN.PDF

Money has to keep flowing, there is such a thing as the circular flow of money (as shown and estimated with the national accounts, the true, consistent, complete and fully estimated macro-model (this of course contrary to haphazard DSGE models which are not estimated but ‘callibrated’ – a procedure called fraud in the harder social sciences: http://www.science20.com/science_20/blog/diederik_stapel_another_world_class_psychology_fraud-84171

John January 29, 2013 at 6:33 am

a log information blogger and mostly low information comments

what is appalling, truly appalling is that the low information blogger is permitted to persistent in offering constant criticism of others, but no one even call him out: Tyler, well what should Great Britain do? It is painfully obvious what Britain should do. It should cut the pound until it achieves a surplus in its current account.

The Anti-Gnostic January 29, 2013 at 8:07 am

Why is that painfully obvious? I don’t see how having foreign central banks fund your deficit can end well, not to mention the appalling level of malinvestment in the meantime. There doesn’t seem to be a single problem out there for which the solution isn’t add money and stir.

CommonSense January 29, 2013 at 4:06 pm

it is malinvestment when people are hired and returned to work?

Britain has only one way out, Beggar-My-Neighbour. That is the Gov’t message on leaving the Euro.

Britain can only do one thing and that is cut imports. It should use every tool from tariffs to printing pounds.

It will hurt, but what else can it do to create jobs?

Frederick Harrison January 31, 2013 at 6:17 pm

Only one thing is sure: In UK the economic crisis is strong for a long time. The Orlando Bisegna Index that measures the intensity of the economic crisis in G20 countries and other European countries, puts the United Kingdom at 10th rank among the countries most affected by economic crisis to 14.50 points for January. Maybe we need to decrease the austerity?

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