Tax and Fiscal Policy

Is George Osborne really returning us to a 1930s government? Accurate comparisons suggest a definite ‘no’


Trade, Development, and Immigration
Economic Theory
The fallout from the Autumn Statement has mainly revolved around one Office for Budget Responsibility (OBR) graph and the words of an excitable BBC journalist. The now infamous ‘Chart 1.1’, from the OBR’s Economic and Fiscal Outlook (below), was accompanied by the statement:

total public spending is now projected to fall to 35.2 per cent of GDP in 2019/20, taking it below the previous post-war lows…to what would probably be its lowest level in 80 years’.

This led to claims that public spending was being cut to levels last seen ‘in the 1930s’ with the BBC journalist Norman Smith claiming ‘That is an extraordinary concept. You are back to the land of the Road To Wigan Pier’ – invoking memories of destitution, poverty and squalor. In our era of ‘regression to the meme’ politics, this idea that the state is being hacked back to 1930s levels (a time before the welfare state) has taken hold and is now being regularly used by politicians.

Many column inches have been filled attacking this claim already. Firstly, it is evident that we are much, much richer today than we were in the 1930s. Since gross domestic product is much higher, real spending is much higher too – in absolute terms and per person. Secondly, despite the caricature, the 1930s were not a period of absolute destitution in much of the country. In fact, we fared much better than the US during the period prior to re-armament without a New Deal. Thirdly, as the Economist has pointed out, spending is not the same as provision of services. According to that paper’s analysis, in 1939 almost half of government spending at 30% of GDP was actually debt interest (14% of GDP). That left 16% of GDP for all other government functions, compared to a 30% of GDP net of debt interest forecast for 2019/20. Far from slashing spending on services to 1930s levels then, state spending excluding debt interest as a proportion of a much larger GDP will be almost double what was seen in 1939 by 2019/20.

Aside from these facts though, nobody has really questioned the whole premise of the OBR’s claim that overall spending as a proportion of GDP will be as low as seen since the 1930s. Until now.

IEA research fellow David B Smith has had an important commentary note published by Politiea which suggests that once one reassesses the data to allow accurate time series comparisons, and use appropriate measures of government spending and GDP, spending by 2019/20 will be as much as 11 percentage points of GDP higher than seen in 1938.

What do these changes entail? First, Smith says that the most appropriate measure of government spending over time is ‘general government expenditure’ which excludes public corporations and the impact of state-owned banks.  For GDP, Smith suggests that the most appropriate measure is GDP at factor cost, not the GDP at market prices we hear commonly cited – because the latter are strongly influenced by changes to indirect taxation (the scale of which has increased significantly in this overall period).

But the adjustments do not stop there. Smith notes that the new accounting methods (the European Standard Accounts definitions – ESA-10) have led to spending levels being between 1 ½ and 2 ½ percentage points lower than before the revisions, meaning data has to be adjusted back to traditional conventions to make accurate comparisons with historic data. This comes on top of other revisions in 2012.

Looking at general government expenditure as a proportion of GDP at factor cost using the new accounting methods suggests that on the current forecast spending will be 39.8 per cent of GDP in 2019/20. But to compare this with the figures Smith has previously calculated for an historic series – including for 1938 – we have to re-adjust this figure to what it would have been using the older conventional methods. Smith estimates that using the old conventions general government expenditure as a proportion of GDP at factor cost in 2019/20 would therefore be somewhere between 41.8 per cent and 42.5 per cent of GDP.

This compares with just 28.2 per cent of GDP in 1936 and 30.9 per cent in 1938. Comparing figures on a consistent basis therefore suggests that even in comparison to the spending figure in 1938 (which was increasing quickly as a result of re-armament), the forecast spending as a proportion of GDP will be over 11 percentage points higher in 2019/20 than the late 30s. And that’s even before restricting attention to spending on services and transfers, by stripping out debt interest.

If a claim sounds too unbelievable to be true, it invariably is. Spending is quite simply not going to return to levels last seen in 1930s, on any accurate comparison. In fact, on Smith’s preferred measure, and if the forecasts are right, spending in 2019/20 would be higher than seen in 2000 and about the same as seen under Gordon Brown’s Chancellorship in 2001.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

9 thoughts on “Is George Osborne really returning us to a 1930s government? Accurate comparisons suggest a definite ‘no’”

  1. Posted 29/12/2014 at 14:08 | Permalink

    There often seems to be an implicit assumption that what we (that is, the government) spend now is somehow the ‘right amount; and therefore that any reduction in that amount is to be deplored. (Any increase, on the other hand, often seems to be welcomed. Some asymmetry here, surely?) May I suggest that if ‘we’ have been overspending it may be the right thing to do to cut back a bit — or, if we have been grossly overspending, cut back quite a lot. Governments, of course, are not the same as families, but even so perhaps it would be sensible for them to adopt one characteristic of the financial practices of most sensible households. Most households first try to establish what they can expect their income (say over the next twelve months) to be (including borrowing), and then decide what to spend that income on (including ‘saving’ as one way of ‘spending’ their income). Governments, on the other hand, often seem first to draw up a shopping list of what they want to spend (our) money on, then look around for ways to raise tax revenues or borrowing to pay for it. No doubt there are many desirable things for households to spend money on, which they simply cannot afford. Is it conceivable that there are also some things that governments desire to spend our money on, but which ‘we’ cannot afford? Dare I suggest HS2 and our nuclear deterrent as two such projects? To go ahead and commit to purchasing such unaffordables anyway reminds one of Eliza Doolittle and her song (in My Fair Lady’) ‘Wouldn’t It Be Luvverly?’

  2. Posted 31/12/2014 at 17:38 | Permalink

    It is highly debatable that we are richer as a result of governemnt spending.

    Why should a third party spend our money any more efficiently than we spend it ourselves?

    Should the government be providing a monopoly health service or a monopoly education system at our expense?

    In fact should the government be providing a monopoly anything at our expense?

    Let governments restrict themselves to defence of the realm, to ensuring full and fair competition and to looking after the interests of the poor and let the markets sort out the rest.

    Of course it will never happen but, if one day it does then 20 percent might be seen as a spend too high

  3. Posted 04/01/2015 at 10:00 | Permalink

    Following decades of innovation and growth one would have expected the need for centrally directed spensing to be almost eliminated by now, save for the public goods of law and order, military defense and very little else. The shock is that politicians are still taking so much of our output by force; actually more in money terms now than the entire national production in the 1930s.

    I wonder why the OBR included that sentence at all in their report. was it done as a gift to the left by a sympathiser in the OBR? It will be misrepresented with glee for years just like the OECD casual observation that, if you apply simple pro rata, there are “3 million jobs dependent on exports to the EU” or as the pro-EU integrationists will express it, their jobs depend on membership of the EU.

    These nonesenses don’t go away just because they are daft. They were not created by accident.

  4. Posted 04/01/2015 at 10:09 | Permalink

    There are so many dishonest people seeking 15 minutes of Fame that ordinary people do not trust any statistics that are published. Just look at all the qualifications and calculations used here to rebut the latest lie broadcast by the BBC. Voters are seeking honesty not perfection, which is why most will be voting UKIP in the next election.

  5. Posted 04/01/2015 at 14:03 | Permalink

    Yes indeed if you believe the state spends our money better than we can ourselves means that if someone steals your car they can use it better?

  6. Posted 04/01/2015 at 20:54 | Permalink

    hint that taxes on the masses might be reduced
    bbc journalist whose salary is paid by a outdated poll tax
    liberal hyperbole to protect the bbc’s backsides

  7. Posted 05/01/2015 at 10:00 | Permalink

    The creep upwards of Government controlled spending, increasingly funded out of borrowed or, worse, “printed”money, is the poisonous assumption of the Soviet/Socialist “Command Economy” model.
    It must be self-evident that as the percentage of Government directed spending extracts an increasing percentage of direct or indirect taxation, coupled with monies printed to make up the shortfall or added to the National Debt, sucking interest out of the shrinking puddle of GDP then the available drips left fund private enterprise.
    And don’t even mention the use of public supply of power forms such as electricity, gas and petroleum as another means of imposing indirect taxation.
    Can someone do a chart showing the “taxation” of a mythical average manual, middle class and upper class Toff when viewed against the visible and almost invisible State theft of taxation, duties, surcharges,levies, etc?

  8. Posted 08/01/2015 at 19:58 | Permalink

    wouldn’t it be great if there was a common sense party. there seems to be a total lack of it in politics today. if everybody agrees that there are problems with our country, why are there so many solutions to solve them, very few using “common dog….”

  9. Posted 09/01/2015 at 08:26 | Permalink

    I think beejaygeecee may find we need more than common sense from a politician but it would be agood starting point.

    I oscillate between thinking they do not understand much at all, just spin and evasion, but other times I suspect they believe the public are incapable of handling a debate with more than a binary choice. My evidence for the former proposition is the shockingly poor performance of state run projects and services; where else comes close to its cost and unsatisfactory output.

    Ultimately the fault lies with the voters who need to engage more and be prepared to abandon past tribal voting and instead chose candidates who appear competent and committed – it does not matter if the change brings in a few charlatains as we have had more than enough of them from the old parties over the years, and they were meant to have vetted them.

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