Margaret Thatcher and the size of government

There are those who still believe that the Thatcher government (1979-1990) rolled back the state and cut taxes.  In fact Thatcherism involved an increase in the proportion of national income passing through the state and an increase in the tax burden.  Only income taxes went down, with great publicity — the more hidden taxes increased.  Value Added Tax, a form of purchase tax, was increased and was by comparison with income taxes regressive, though not quite as regressive as the additional taxes which were levied on alcohol and tobacco…the Thatcher government, and indeed subsequent ones, ended up spending more in absolute and even in relative terms on welfare taken overall.

That is from David Edgerton, The Rise and Fall of the British Nation: A Twentieth Century.  Here are my previous posts on the book and on other work by Edgerton.

Comments

Tyler- Edgerton looks just verifiably wrong on this. I can't work out where he has sourced this info.

Link to UK's Office for Budget Responsibility Public Finances Databank http://obr.uk/download/public-finances-databank/

Total expenditure: 1979/80: 41.0% of GDP; 1990/91: 34.7% of GDP
Public Sector Cur Expenditure: 1979/80: 34.2% of GDP; 1990/91: 30.7% of GDP
Public Sector Receipts (incl income from nationalised industries): 1979/80: 37.3% of GDP; 1990/91: 33.8% of GDP
National Taxes: 1979/80: 31.% of GDP; 1990/91: 30.5% of GDP

Whatever way you cut it, according to UK government data she oversaw cuts to both government expenditure and taxes as a share of the economy.

Interesting though that London was a lot safer back then. Maybe there is a more important more topical issue in England that we are ignoring in an effort to denigrate Ms Thatcher.

Hmmmm. Lets guess. Oh...darkies!

Russian mafia too - oh wait, we don't talk about that, right?

Besides, the sort of Russians that live in high end real estate in places like Baden-Baden or Chelsea are known for playing by the local rules.

Disgusting comment. What is your point?

Either deport browns or jail them.

"deport browns or jail them"

That would mean that the current British Home Secretary (and Police Minister) would initiate legislation to jail himself and his family.
The world has moved on since 1941.

OK, but here's an historical graph of UK government spending as a % of GDP by year:

https://tradingeconomics.com/united-kingdom/government-spending-to-gdp

Nice spot, so delete Edgerton's "even relative" remark but the rest of his observation stands. And US government spending, relative to GDP, was higher throughout the Reagan 1980s, see: https://tradingeconomics.com/united-states/government-spending-to-gdp (expand to MAX)

"...ended up spending more in absolute and even in relative terms on welfare taken overall".

Perhaps the saving qualifier is "on welfare taken overall" (definition sorely lacking) which, perhaps, does not encompass all categories of "spending".

Even if this is correct, the selected quote and the implied conclusion would be misleading.

Tyler should clarify his post about "Margaret Thatcher and the size of government".

Reagan was the same. The proportion of US government expenditure relative to GDP was higher in 1990 than in 1980. Source: St. Louis Fed website.

As David Stockman wrote in his book "The Triumph of Politics", the first two years of Reagan was a tug-of-war between Stockman idealists and Meese, Regan, Deavers et al. "realists", and the populist realists won out. An influential op-ed was a piece published in the WSJ that stated the Republicans could be Santa Claus, cutting taxes and increasing spending, which guaranteed the public would keep the Republicans in power. The Laffer curve was the justification at first, then, later, the "Starve the Beast" thesis (the worse, the better, a Leninist construct). Shades of LBJ's "guns and butter" thesis.

Bonus trivia: William Niskanen formulated the "Starve the Beast" theory then before his death repudiated it, see Limiting Government: The Failure of “Starve the Beast.” Cato Journal 26, no. 3 (2006): 553–58. Some DC think tank has a building named after him, showing you can be spectacularly wrong and still die famous.

Reagan stemmed the tide of increasing government spending as a % of GDP, which was at 15.7% in 1956 and peaked at 22.3% during the 1982 recession. But yes, Thatcher's policies in the UK dug deeper, but they were in worse shape ("Labour isn't working". 1970s Britain was bad news.)

So, the growth of spending as a percentage of GDP went down under Reagan but still increased overall?

The second derivative was negative basically?

No. Increase from 1956-1982, see-saw since then based on state of economy.

@BD - or not, see my figures below.

Federal spending was 20.5% of gdp when Reagan left office vs. 21.6% when he took office. Considering the fact that net interest payments had increased from 2.2% to 3.0% during the same period, that seems like a pretty decent record.

Wikipedia is your friend* Zack M: "The results of Reaganomics are still debated. Supporters point to the end of stagflation, stronger GDP growth, and a entrepreneur revolution in the decades that followed.[3][4] Critics point to the widening income gap, an atmosphere of greed, and the national debt tripling in eight years which ultimately reversed the post-World War II trend of a shrinking national debt as percentage of GDP.[5][6] The federal government's share of GDP increased 0.2 percentage points under Reagan, while it decreased 1.5 percentage points during the preceding eight years.[85] The number of federal civilian employees increased 4.2% during Reagan's eight years, compared to 6.5% during the preceding eight years.[86]"

Bonus trivia: here in the Third World Philippines, some teachers I know tell their students: 'don't use Wikipedia as a source, since the internet is untrustworthy'. That was true about 20 years ago, no longer. Remember Ray's Rule: NOTHING works in the Third World. NOTHING. Always adopt Developed Country logic and eschew Developing Country logic (and that includes China, India, Greece, Brazil--sorry TR).

See "Historical Budget Data" https://www.cbo.gov/about/products/budget-economic-data#2

Total spending was 20.5% of gdp in FY1989 compared to 21.6% of gdp in FY 1981. Net interest payments were 3.0% in 89 vs. 2.2% in 81.

And no, Wikipedia is generally not your friend when looking for a serious analysis of Republican or conservative politicians. That article is one of the most dishonest I've seen. Note how the "Income and Wealth" section compares the different time periods in nominal rather than real dollars to show how high growth rates allegedly were in the 70's (they appear to do this in other sections as well).

Sigh...Zack M does not understand statistics.

You don't cherry pick one year and compare to another year ten years prior Zack M, that' s not accurate. Instead you take averages over many years, to wit, " The federal government's share of GDP increased 0.2 percentage points under Reagan, while it decreased 1.5 percentage points during the preceding eight years.[85]" Eight years Zack M, not one year.

As for your nominal vs real comment: growth rates are typically expressed in nominal terms not real, that's the convention. To account for inflation, you can use 'constant dollars'.

I just posted the link to the numbers, Ray. Spending was 20.5% of gdp when he left office vs. 21.6% when he took office. Is 20.5 higher or lower than 21.6?

Cutting and pasting the same Wikipedia quotes doesn't change that. By the way, if you clicked your own link you would see that article isn't even looking at total government spending. They're only including "government consumption expenditures and gross investment," which accounts for less than half of total government spending.

"growth rates are typically expressed in nominal terms not real, that's the convention."

LOL. Ok then.

"To account for inflation, you can use 'constant dollars'."

My entire point is that the stats in that incredibly awful Wikipedia article didn't do that. You should read it.

Reagan quadrupled the deficit. Say what you want about Bush or Obama, but they only doubled it, although Bush didn't have a good reason but Obama did. Trump looks to break all records with his spendthrift ways, he went bankrupt how many times? Fiscal conservative? More like fiscal con or just con.

The executive branch doesn't determine the size of the federal budget, Lugh. And considering net interest payments were at historically high levels, a peak deficit of 5.9% of GDP following back to back recessions doesn't seem particularly unusual to me.

"Regressive" taxes do less to discourage working and saving than "progressive" taxes do, so just affixing the "regressive" label does not prove they are worse than other taxes. It depends on whether you think the tax code should efficiently raise revenue or be a means of redistribution.

Indeed. A study once found the 'best' tax to raise revenue would be a regressive one where the poor and middle class would be taxed heavily while the 1% and above (like me) would pay no taxes. The theory was the middle class by definition will always be with us, so they can pay the brunt of taxes, and by not taxing the rich the lower classes would have a strong incentive to become entrepreneurial to escape taxes. Pretty sure this scheme would not survive politically, but it does make logical sense.

Less than 6 figures is not the 1%

If you think not about money but of the distribution of goods and services, it is impossible to reduce the consumption of much of the 1% at a non-destructive rate of taxation. Scott Sumner has proposed something like a progressive consumption tax with up 7a 70% rate top marginal rate. I tend to agree with him but that might be because I am a huge saver these days since my business has taken off. My income has shot up but not my spending.

How do you track consumption to keep it progressive? The surveillance state is too large as it is already.

You allow people run all their income into and IRA type account and tax them on them on withdrawals from the account. If they own small businesses the stick would be held in the account also. The income tax is already very intrusive I do not see how this would be much worse.

A large flat consumption tax coupled with a modest UBI is approximately a progressive consumption tax, without becoming an accounting thicket.

I guess all the low-income folks with their own window-washing, housekeeping, dog-walking businesses aren't "entrepreneurial"? That's a load of bullcrap. C'mon, the vast majority of the super-wealthy came from upper middle class families and went to great schools and have connections, just like their parents. Everyone has an incentive to be rich, it's just easier for some.

I floated this idea a while ago, why bother having taxes?

Each year let the Fed issue some set amount of base money growth to the Treasury. Then let the Treasury issue bonds to fund all current spending as well as roll over past debt. Most taxes would be eliminated but Social Security could be partially replaced with a program where people buy 30 year bonds. Instead of fines, large corporations that get in trouble with the law would be required to buy large balances of 50 year bonds and not be allowed to sell them for a few decades.

I do not think you could sell enough bonds to cover all the spending.

1. The Fed would continue to set short term interest rates and would tighten if they see inflation picking up.

2. Spending might be less than you realize. If immediately everyone's take home income jumped 10-20% spending on a lot of things like food stamps would drop. Also keep in mind whatever the economic dead loss of taxes are to the economy would be immediately recouped.

3. So the money that used to be taxed isn't anymore. What happens then? Choices are only spend it or buy bonds. If it is spent it is someone else's income. They either spend it or save it. They save it they either buy bonds or put it in the financial industry. The financial industry either invests it or buys bonds. At the end of the day either the economic is going to expand dramatically or there's going to be enough bond buyers to fill the demand.

Interesting in a though experiment way - if you could make it worth, would the Democratic party be okay with it? The left would be furious because of all the extra income the wealthy would receive. I think there is a pretty strong argument it would end up being a regressive shift in income/consumption overall just because the current tax system is so aggressively progressive (even though it fails to levy higher rates on the top 0.1%).

A better balance might be to just eliminate taxes for incomes <$100K. Some of the worst marginal tax rates are in the low to middle income ranges where benefits are phasing out and state+federal income taxes start to kick in. You can at least get rid of the tax portion.

The last time you had a Democratic 'class warfare' tax increase it was from 31% to 39.6% under Bill Clinton. Then the purpose of the increase was to control the deficit (and keep the Fed from tightening to prevent inflation). Rich people do well under Democratic administrations, though they like to tell themselves they are being persecuted. I guess like Red State Americans think Trump is fighting for them as Republicans debate whether healthcare reform means 10% or 20% of them will lose coverage.

government money-borrowing does not show up as "spending" in government accounting procedures in years each loan is incurred. Loans have costs (spending). UK & US borrow money in huge amounts.

Source? I too thought of this as an explanation but could not find any source for it.

Government money-borrowing is counted as spending in the year the money is spent - in practice, I doubt that makes much difference from counting as spending in the year of the loan

My impression is the Treasury runs periodic auctions (you can see the calendar at the bottom of https://www.newyorkfed.org/aboutthefed/fedpoint/fed41.html) to 'borrow' money by selling Treasury bonds. The Treasury is basically borrowing to keep their account from going negative so each month's and year's borrowings is showing up as spending. Granted they probably leave some cash balance aside each month but that's probably not much and strictly speaking that wouldn't be spending. If the Treasury borrowed $100B and kept the money aside as cash that's not spending.

I'm not sure I follow this. The stuff the gov't does with borrowed money is counted as spending so counting the borrowing again would be double counting. Are you saying if the gov't issues $100B in bonds, spends $80B then the $20B left over as cash should be counted as spending?

VAT is supposed to provide a measure of economic activity. However a lot of economic activity adds no value. For example a house isn't more valuable because a solicitor has conveyed it from client A to client B. A house is more valuable because a builder has built an extension to it. But these activities are of comparable orders of magnitude of cost and attract the same amount of tax.

It would be less misleading to call it Goods and Services Tax as done in some legislatures.

In addition, it should be used solely as a tax, not as a means to hide the true cost of something. Many traders, and professionals are even worse, quote a price and when the prospect has swallowed it then reveal that there is VAT on top. Even estate agents do it. What owner of a private home is ever able to claim back VAT as part of a trade or business? Even if he is a registered trader, selling his home would be a "self supply" and claiming the tax back would be an offence.

This appears to amount to a claim that services don't have value. Why then, are client A and client B willing to pay the solicitor?

Good point worth discussing, Dan1111.

In the case of a mutually agreed transaction, the parties pay solicitors because the laws of the land require them to for that particular type of transaction. Laws are made up by legislatures with a far higher proportion of lawyers than the general population. They are too complicated for the average person without a law degree to understand. However the "value" isn't value added to the nation as a whole, and it can't be transferred on like the value of an extension built onto a house.

Are we talking about total spending or restricting ourselves to only the purchase of goods and services?

Income tax rates may have decreased but in constant dollar terms income tax revenues actually increased as a share of total revenue. See: https://www.ukpublicrevenue.co.uk/revenue_chart_1980_1990UKk_17c1li111mcn_F0t10t

There is this thing called the Laffer Curve. Edgerton should look it up.

And look at total spending per capita in constant dollars and on welfare spending: https://www.ukpublicspending.co.uk/spending_chart_1980_1990UKd_17c1li111mcn_F0t40t

The US could use a performance like that. Who has done better? I think the haters need to make up their mind as to whether every budget increase that is less than a full baseline increase is the end of the world and a savage attack on the poor, or not.

Post hoc propter hoc

Look it up.
https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc

Forgot the ergo, sorry.

No worries. I know about post hoc errors. So what is your explanation? Privatization, deregulation? No, of course not. Let me guess. Heath era investment in human capital development? Just like current increases in manufacturing employment are atrributable to Obama increases in training program spending? Please tell me it is not all that obvious and predictable.

No, you didn't control for bias selection of data, or show causality, or even specify variables or control for others.

Here are some equally valuable variables you can throw out when you don't do any analysis.

How about weather patterns over the North Sea, the size of fish in the ocean. The number of football tournaments won or the number of pubs per square meter.

Just putting random graphs of data out there is not analysis.

Post hoc ergo propter hoc.

Amen.

And she definitely reduced the annual budget deficit per capita so, at least for future generations, she reduced the burden of government:
https://www.ukpublicspending.co.uk/spending_chart_1980_1990UKd_17c1li111mcn_H0t
even if she was only able to hold real total spending per capita constant for a decade: https://www.ukpublicspending.co.uk/spending_chart_1980_1990UKd_17c1li111mcn_F0t

You mean the Labour Party's upsets were derived from the frustration of latent plans to make the state even larger?

1. What happened to the portfolio of state owned industry/

2. What happened to the portfolio of public housing?

3. What happened to the regime in industrial relations?

4. How much of the increase is attributable to demographic factors?

While we're at it, the top tax rate on investment income in Britain pre-Thatcher was 98%, so reducing income tax rates really is just a trifle.

This is, IMO, why total spending or spending as a % of GDP is a deceptive metric. Imagine a government that owns 30% of all industries but there's little or no safety net. Their argument is if you need money get a job and the gov't coal mine is always hiring so there's no need for much welfare unless you are very disabled.

A free market orientated neo-liberal administration spins off these gov't enterprises. They go public and get sold on Wall Street and stock owners then appoint boards that radically downsize the industries to achieve savings and productivity. Welfare spending will go up as now all in the sudden you get a lot more unemployed and income inequality starts increasing. GDP growth will likely also pick up but it won't pick up as fast as the first and it will take years for sustained GDP growth to expand the denominator...hence it looks like gov't spending as a % of GDP has gone crazy and the gov't is run by a bunch of socialists when in fact just the opposite.

so this groundbreaking work that Tyler has been touting is likely innumerate garbage re the significance of key historical eras?

as has been pointed out, Thacher can either be a hypocrite or an enemy of the left, but not both. which is it, Edgerton?

Once again demonstrating that for conservatives it isn't the size of government that matters, just who gets screwed.

This reminds me of people who say it's as cheap to fly as ever. Maybe, but my ticket seems to buy me less and less every year.

You can buy first class and get first class service.

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