How far will public expenditure levels constrain the next government?

By Monimbo

Each year the UK Housing Review maps the recent past and future prospects for public expenditure, focussing on housing.  What does it tell us about prospects for housing investment if there is a change of government?

If you listen to the Chancellor, you’ll have the impression that the last Labour government was profligate with public money.  But in fact, as the last edition of the Review shows, Total Managed Expenditure as a proportion of GDP was lower under Labour than under the Tories for the first seven years, and only rose above it by about one percentage point for four further years, until the economic crisis pushed spending up in 2008/09.  In effect since then governments have been struggling to reduce expenditure as (in the same year – 2008/09) government borrowing and government debt both shot up as a proportion of GDP. Looking ahead, while borrowing is now forecast to fall fairly sharply, the trajectory for gross debt is that it will continue to grow.

New projections will be set out in the next edition of the Review, due out shortly, but I wanted to speculate about the position that a new government will be in, after the 2015 election.  On present forecasts, in 2014/15 spending will be running at a higher level (as a proportion of GDP) than at any time over the period 1997/98 to 2007/08.  In fact, if we compare public spending (always as a percentage of GDP) across recent governments, the last Labour government turns out to be the least profligate, even compared with the Thatcher-Major governments.  This is shown by a useful graph from Colin Talbot’s Whitehall Watch blog.

Public spending as percentage of GDP under different governments (1965-2015)

public spending graph

The obvious point to be made about this graph is that, since the economic crisis, GDP has fallen, and so spending as a proportion of GDP has risen, quite apart from the extra spending resulting from the crisis itself.  However, the Review’s table 13 also shows that actual spending, in constant prices, was lower in the years 1997/98-2007/08 than in any year since.

I don’t want to suggest that the next government won’t face harsh challenges and hard choices.  But the figures do underline the point that Labour in power achieved much without historically high levels of spending, until hit by the economic crisis.

One of the challenges in housing must of course be to restore some balance between bricks and mortar investment and spending on benefits.  Looking back on a typical pre-crisis year under Labour, 2004/5, of total expenditure some 56 per cent was allocated through Departmental Expenditure Limits (DEL) and the remainder through ‘annually managed’ budgets, a large share of which is benefit spending.  The Budget 2012 showed that DEL is expected to fall to just 47 per cent of total spending by 2016/17, a significant shift away from departmental spending programmes, of which of course housing is one.

It is probably wrong to make too much of these comparisons, but in terms of the potential for boosting social programmes such as housing, they do suggest that priorities within public spending from 2015 may be as important as actual levels of expenditure.

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3 Responses to How far will public expenditure levels constrain the next government?

  1. Pingback: Labour must nail the lies about the deficit and debt | Red Brick

  2. grahamangus says:

    It is a very complex subject and the first point to be made is that fewer dwellings were built under New Labour than the wicked Tories before 1997, however under the present Tory Government it has reached an all time low. The main reason is two fold,significant drop in revenue especially from financial sector and current priorities with much less money coming in, The IFS showed very clearly that the proportion of public expenditure going on Health and Care had been increasing for 20 years and can be expected to go on increasing for the forseeable future, which unless we change direction means less for everything else including housing. If further overall increase in taxation is ruled out,we must find another way of paying for Care and possibly Health if we want to increase spending on housing and many other programmes or reducing other areas eg. Trident Programme. There are no easy answers. Presumably Governments of both colours will give the highest priority as at present to health and care

  3. Monimbo says:

    Colin Talbot has just responded to critics of his analysis, and gives a detailed reply here:

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