Deloitte-uk-the-size-of-the-uk-state

While they disagree on many things, the UK’s Labour and Conservative parties seem to favour an expansion in the state – though to very differing degrees.

Both are committed to increasing public expenditure, particularly on health and infrastructure. The Resolution Foundation estimated earlier this month that under either of the major parties UK public expenditure will increase by the end of the next Parliament to levels last seen persistently in the 1970s.

According to the Resolution Foundation the Conservative’s plan would see spending rise from around 40.0% today to 41.3% of GDP by 2023-24. Under Labour’s far more ambitious plans spending would rise to 43.3% of GDP.

This means a material expansion in the size of the state relative to pre-recessionary norms. In the 20 years to 2006-07 public expenditure accounted for 37.4% of GDP.

The shift to a larger state is starting to happen. The new chancellor, Sajid Javid, has replaced his predecessor’s rules for controlling public spending and debt with less demanding ones. Earlier this month the chancellor ended to the freeze on working-age benefits introduced by George Osborne in 2016.

In an inversion of the relationship of the last ten years private sector activity is slowing and government spending is accelerating. The annual pace of GDP growth slowed to 1.0% in the third quarter while growth in government expenditure accelerated to almost 4.0%, close to rates seen during the surge in public sector spending under the last Labour government almost 15 years ago. Public sector investment is currently rising even faster, at an annual rate of over 10%.

Both major parties want to take advantage of the low cost of public sector borrowing to finance public infrastructure spending. This implies that the ratio of public sector debt to GDP, which has doubled since the financial crisis to around 80% of GDP, will stay higher for longer.

But some of the planned increase in public spending is likely to come in the form of current spending – on salaries, services and benefits. Both parties appear to believe that current spending should be funded from tax revenues, not borrowing. Voters seem to have warmed to the idea of a larger state.

An opinion poll commissioned for Deloitte’s latest State of the State report found that 58% of some 1,400 adults surveyed said they thought that government services should be extended, even if that means higher taxes. Just 13% of respondents favoured reducing public spending to finance tax cuts.

Britain’s public finances, like those of many other rich countries, already faces headwinds from an ageing population and slower trend growth. Declaring an end to austerity is the easy part. A central task for governments through the 2020s will be to strike a balance between the size of the state, public borrowing and levels of taxation.