The last 125 years have seen a significant expansion in the size and role of government. Growth has not been linear, with wars, crises and politics, creating swings in the size of the state. The post-war Labour government created the welfare state, permanently expanding the role of government. Under prime minister Margaret Thatcher, privatisation and the winding down of cold war defence spending shrank the state.

The unmistakable trend in the last 25 years has been towards bigger government. The UK has gone from a relatively small state in the late 1990s to a large one today. The ratio of government spending to GDP has risen from under 35% in 1999–2000 to 45%.

Current plans envisage spending running around 45% of GDP through to the end of this decade. That would represent a period of sustained, high spending unparalleled since 1945. UK government spending is now closer to European than to US levels. 

Events and political choices got us here. 

The first big boost came in the early 2000s when the Blair government raised spending on health, education and public investment. This was a political choice and reflected growing disenchantment with the austerity of the Thatcher and John Major years. Against a backdrop of good economic growth and relatively strong public finances higher spending looked eminently affordable.

The next leg up to public spending was driven by events, not politics. The financial crisis triggered a deep recession and propelled public spending to a 30-year high. The coalition and then Conservative government that governed from 2010 spent ten years squeezing spending back down to the levels that prevailed on the eve of the financial crisis in 2007.

But Conservative chancellors did not seek to reverse the large, Blair-era rise in spending that preceded the financial crisis. And, by 2019, after a long period of austerity, the feeling in the government and the country was that austerity had run its course.

Sajid Javid, who replaced Phillip Hammond as chancellor in July 2019, eased his predecessor’s rules for controlling debt and pencilled in increases in public expenditure. In opposition Labour was proposing even more ambitious plans to boost spending, and both parties went into the 2019 general election with plans to expand the state. The political mood was, as it had been in the early 2000s, for higher public spending.

Then came the pandemic, which rendered all spending plans obsolete, and took public spending to 53% of GDP, a level only previously seen during the second world war. As pandemic support wound down and the economy recovered the state shrank – but not back to pre-COVID levels. The current projections assume that expenditure will stick at around 45% of GDP.

Looking back over the last 25 years, the pandemic, and before then, a shift to higher health and other spending under Tony Blair and Gordon Brown explain much of the increase in the size of the state since 2000.

A bigger state is financing much higher levels of spending on health and social security. Demographics and factors beyond the control of government, such as wage inflation, are significant drivers of spending. The government can, of course, make changes – subject to, as last week’s government reversal on cuts to sickness and disability benefits shows, being able to retain the support of its own MPs. 

Higher health spending is by some way the biggest single driver of the post-2000 expansion of the state, accounting for well over of a third of the increase in spending. Social security, through higher spending on pensions, disability benefits and working age benefits, accounts for 16% of the uplift. Rising debt financing costs, due to higher levels of bond yields, account for a similar share. The rest of the uplift to public spending is thinly spread across a number of areas.

High levels of public spending don’t seem to be delivering better services. The British Social Attitudes Survey shows satisfaction with the NHS, which has been a priority for successive governments, fell to a record low last year. The survey also shows that public support for raising taxes and public spending has fallen well below the averages of the last 40 years, while support for cutting taxes and spending, although in low double digits, has never been higher.

It is too early to say that public opinion is tilting in favour of a smaller state. But with levels of debt, taxation and public spending at elevated levels, the scope for a further increase in the size of the state looks increasingly limited. Faster growth would help, but after years of disappointment, no one is banking on a step change in Britain’s growth rates. On top of the inexorable rise of health and welfare spending, more money has to be found for interest payments and increased defence spending.

All of this means that the headroom in the public finances for dealing with adverse shocks, such as recession, is limited. As chancellor George Osborne compared his drive to reduce debt to repairing the roof when the sun was shining. In recent years we haven’t had much sun – in terms of growth – and attempts at repair are, well, incomplete.