The shrinking state

1 Apr 15

Whatever the election brings, something that feels like austerity will continue. George Osborne’s tenure at the Treasury has locked Britain into permanently lower taxes and smaller government

The 2015 Budget offered George Osborne his last opportunity (in this Parliament, at least) to affect the future of the UK economy. A Budget is always a political opportunity for a chancellor. New optimism can guide the near future, particularly with an election just a few weeks away. Even though the government’s deficit remains substantial, there has been media speculation that Osborne would begin to hint at less severe public spending austerity in the years ahead. Tax cuts have already become part of the pre-election bidding war between the parties.

The recent American campaign to keep Nato-member defence expenditure at 2% of GDP was remarkable to behold: it is rare to see overseas governments lobbying, in effect, for higher public expenditure in Britain. Defence spending will have fallen from 2.6% of GDP in 2010/11 to about 2% in 2015/16. Under the chancellor’s plans for spending to 2019/20, there is no way that defence can avoid dipping to significantly below 2%.

The Office for Budget Responsibility shows local government budgets declining from about 3.5% of GDP to about 2.8% in 2015/16, a similar relative fall. It, too, is doomed to decline further in the coming years.

The Budget and the forthcoming general election are stages on the road to a very different kind of state in Britain. It appears to be the settled will of the people that taxes should not rise above 37-38% of GDP. Every time the Conservatives lower taxes as a share of GDP, it is harder for Labour ever to raise them again: by adopting a ‘we are the 99%’ approach to taxes, it is impossible to raise much additional revenue from the rich 1%. As the deficit is reduced, government spending as a share of GDP will drop.

Of course, it is possible that if Labour were to win the general election they will simply allow the deficit to stay at, say, about 3% of GDP and allow slightly higher public spending than might otherwise be the case. As long as there is not another recession in the coming years, such a policy might just work. But even if this happened, it is hard to see overall public expenditure rising much faster than growth in the whole economy: perhaps 2% or 2.5% per year.

Compare this with the average annual increase of almost 6% while Labour was in power between 2000/01 and 2010/11. During this period, NHS spending rose from 5.2% to 8.0% of GDP and social protection from 12.8% to 15.3%. The major parties are all committed to real increases in NHS funding, while pensions enjoy a ‘triple lock’ protection. Pupil numbers are growing sharply, so schools’ spending will rise.

Never again will NHS spending rise by 72% in real terms in a decade as happened between 2000/01 and 2010/11. But health, social protection, schools and possibly defence will expand in real terms and possibly as a share of GDP. Other public provision will face continuing reductions up to 2020 and beyond. Whatever the outcome of the election, something that feels like austerity will continue.

The only way to change this inevitable progression would be for a government to raise taxes as a share of GDP. But a combination of international tax competition and fear of voters stops mainstream politicians from taking such a step. The UK is locked into a path of permanently lower taxes and a smaller state. The general election campaign will attempt to disguise this reality, with small offers to sections of the electorate. George Osborne’s tenure at the Treasury has been the shape of things to come.

This was first published in the April issue of Public Finance magazine

  • Tony Travers
    Tony Travers

    Tony Travers is Director of LSE London, a research centre at the London School of Economics. He is also a visiting professor in the LSE’s Government Department. His key research interests include local and regional government and public service reform. He has been a member of the Audit Commission, a King’s Fund associate and advisor to a number of Commons committees. Tony writes and broadcasts extensively on public finance, local government and policy issues.

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