‘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.