Severe as it has been for the welfare of the British people, eight years of so-called austerity under three Conservative governments are but the most recent manifestation of Tory assaults on public services. Since Margaret Thatcher became prime minister almost forty years ago, contracting the public sector has been a constant theme across Tory governments.
Chart 1 shows total pubic spending as share of GDP over four decades, 1980-2017. In the first three years of the Thatcher government the share of public spending in GDP rose. This unexpected rise resulted not from an expenditure increase, but from contraction of GDP, a severe recession consciously provoked by then-chancellor Geoffrey Howe with the putative purpose of reducing inflation. The share of public spending declined continuously for the rest of the decade, falling from 42.8% in 1979, in the last year of the Labour government, to less than 35% in 1989 (Thatcher’s last full year in power).
By comparison the years of the Major government were relatively benign for public spending, though continuously below the 38 year average and falling after 1992. The return of a Labour government briefly coincided with further decline, to 35% in 2000 from 37% when the Major government staggered to its unlamented end in a near electoral wide-out. The decline at the end of the 1990s represented the reverse causality of the early 1980s. A four year average growth rate of 3.5% resulted in GDP expanding faster than public expenditure. During the last of the Blair years, 2000-2007, the public expenditure share in GDP rose almost continuously, to well above the period average. In 2007 just before the global financial crash public spending relatively to GDP had returned to the four decade average of 39.7%.
In the early 1980s a policy-induced recession pushed up the spending-GDP ratio by driving down GDP. A far more severe and certainly not intended recession arrived in 2008. The collapse in GDP combined with strong countercyclical fiscal policy took public sending to 44% of GDP in 2010. Following the reactionary tradition of Thatcher, the Cameron governments quickly and aggressively reversed that increase. This neo-Thatcherite assault on public spending, faithfully continued by the May government, again brought the spending share below 40%.
Chart 1: Tory austerity, been there before
Total public spending as share of GDP,
percentage point deviations from average (39.7%),1980-2017
Source: UK Treasury.
The second chart shows the clear link between squeezing public expenditure and economic growth, an interaction I analyzed in an earlier article for Prime. During the Thatcher-Major years when the public expenditure share fell drastically, and remained consistently for long term trend, the 17 year average GDP growth rate was 2.2%, negative in five of those years.
By contrast during the 10 Blair-Brown years prior to the global crisis, when the spending ratio rose, GDP growth increased to an average of 3%. The seven full years of Cameron-May brought us back to the Thatcher-Major rates, even lower at 2.2%. Four decades changed neither Tory economic policy nor its outcomes – a contracting public sector and growth rates well below potential.
Chart 2: Tory growth stagnation is nothing new
GDP growth, percentage point deviation from average (2.2%), 1980-2017
Note: Average growth rates for sub-periods on chart. Source: Office of National Statistics.
2 responses
Prof Paul Krugman and Prof Simon Wren Lewis aren’t wrong about austerity policies, a shame their names and works aren’t widely known by the general public. Austerity is a delusion. Timber imports contribute to the second largest trade deficit by sector in the UK after food. We are also the second largest importer of timber in the World after China. The level of forestry investment in the UK is pitiful, and that story extends to other industries. I work in a govt section that deals with forestry, and funding and salaries have been slashed to the point of making it defunct. It struggles to retain and recruit and it is getting worse. The flamboyant claims and expectations of govt to meet woodland creation targets is unrealistic. Austerity is real, and lack of investment is real. Meanwhile the TAR govt in Tibet last year (under Chinese control) created 75,000 of new woodland. What did the UK create? Not much more than 10,000ha. Lack of investment in skills, knowledge, people etc is a real issue in the UK.
GDP growth in the Blair era was fuelled by a massive surge in private sector borrowing.