The state in 2017 – we don’t need scare stories, the reality will be bad enough!

The folk at the Guardian Data Blog have been having some fun with the IMF’s latest World Economic Outlook Data. “Public spending will plunge,” wailed Aditya Chakrabortty, as he produced this chart to show just how far David Cameron wants to shrink the state.

Government spending as a percentage of national GDP. 

Source: IMF WEO Database Oct 2012

As he explained:

The UK will plunge from public spending on a par with Germany in 2009, to spending less than the US by 2017.

Fan or critic, nearly everyone now agrees that this government wants to shrink the state, but very few take on board what that means. This graph shows just how radical those ministerial plans are. Particularly striking is the fact that Britain will end up spending less as a proportion of its national income than even the US, the international byword for a decrepit public sector.

There are a couple of things about these claims that are annoying. First, let’s take the comparison with Germany. Believe it or not, the IMF reckons the UK’s GDP will grow faster than that of Germany over the next five years. Therefore, part of the reason the decline in public spending as a percentage of GDP looks so steep compared Germany’s is because the UK’s GDP is getting bigger at a faster rate.

Percentage annual GDP change 2007 – 2017

Source: IMF World Economic Outlook October 2012

As I’ve said before, there are two ways of making a percentage smaller. You can either reduce the number on the top of the fraction (in this case public spending) or increase the number on the bottom (in this case GDP).

For the past five years or so, right-wing ranters have been saying ‘Oooh look, the ZaNuLabour Communists increased public spending to 47% of GDP.’ (Repeat ad nauseam with with favourite hate-filled clichés.) It’s drivel of course because, as we can see from the graphs, public spending as a percentage of GDP shot up almost everywhere in 2009 because, almost everywhere, GDP shrank.

Chakrabortty’s argument is the same fallacy in reverse. Yes, the UK government plans to cut spending but the steepness of the decline compared to Germany is, at least in part, due to Britain’s projected faster growth. Historically, German government spending has been around 44 percent of GDP compared to around 39 percent in the UK. The IMF projections suggest that both will return to their mid-2000s spending ratios by 2017.

So much then for Germany. What about the comparison with America? It is true that public spending in the USA has traditionally been lower than that of Europe. However, the Obama government plans to keep its spending levels high for the next five years. Given that its economy is also growing, this will be a real-terms increase of something like 12.5 percent. In short, then, the UK’s spending isn’t falling to US levels; US spending is rising to meet British levels. It’s the American figure that is the “shift so dramatic”, not the British one.

Public Spending as a percentage of GDP 2006-2017

Source: IMF World Economic Outlook October 2012

None of this is to say that the UK’s public spending isn’t going to reduce significantly. It clearly is, as this graph from Duncan Brown’s excellent and very detailed critique of the Chakrabortty article shows:

Public spending goes up in cash terms but allowing for inflation the IMF expects it to reduce by around 4 percent over the next five years. This is a lot but it takes public spending back to the level it was at just before the recession.

Both in real terms and as a percentage of GDP, then, the IMF predicts that public spending will return to somewhere around its mid 2000s level by 2017. (Incidentally, that also tells you something about how long it will take our economy to recover. It doesn’t get back to its pre-recession level until 2014.) This hardly represents a savage shrinking of the state. You can make it look that way if you draw comparisons with Germany and the USA then plot them on the right graph but, however you look at it, all this really represents is a slight reduction on the size of the pre-resession state.

So does that mean everything will be OK then? Will things go back to being the way they were before the recession? Unfortunately no, for the simple reason that 2017 will be very different from 2007. That’s the problem with historical comparisons.

According to projections from, among others, NIESR, Oxford Economics, the IFS and the Local Government Association, it will be towards the end of this decade when the rising costs of an ageing population really start to kick in. Even if it has roughly the same amount of money (in real terms and relative to GDP) the 2017 state’s costs will be higher. Add to that the increased population (Per Capita GDP only gets back to 2007 levels in 2016), higher public debt (88 percent of GDP as opposed to 38 percent in 2007) and the as yet unknown costs of climate change and you have a state with a much greater financial burden. It will therefore have less money available than its 2007 predecessor. This makes two things almost a dead cert. Firstly, it will be extremely difficult to shrink the state much below its 39 percent GDP level. At least, not without severe hardship and social unrest. Secondly, further cuts to some services are inevitable unless there are significant tax increases. PwC estimates this as the equivalent to raising the retirement age to 70 and a 2 percent increase on both employers and employees’ NI.

This is bad news both for Tory state-shrinkers (they won’t be able to) and Labour big spenders (they won’t be able to either). Which is what Ed Miliband was trying to say when he was booed on Saturday.

Of course, if the IMF’s growth forecasts prove to be optimistic, and there is reason to suspect they might be, then things could be even worse. This would make the decline in spending on Aditya Chakrabortty’s graph less steep but we’d be in even bigger trouble.

Hysterical claims about public spending shrinking to US levels and being the lowest in the developed world (which isn’t true either) don’t add much to the debate. They are easily refuted and have been on a number of blogs this week. Such hyperbole is unnecessary because, come 2017, things will probably be bad enough anyway.

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4 Responses to The state in 2017 – we don’t need scare stories, the reality will be bad enough!

  1. Pingback: The state in 2017 – we don’t need scare stories, the reality will be bad enough! - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Needs2Cash says:

    A hair on my iPad’s screen? No, it’s part of the graph!

    Usually inflation shrinks debt but years of rewarding borrowers with low interest rates at the expense of savers will hurt us all (instead of just the borrowed money junkies) as we choose to live within our means.

    Why compare 2017 with 2007? Today’s congestion on our railways, airports and roads tells me that we cannot afford to return to the “peak years” when surfing our housing bubble.

    Better to adjust our expectations to a more sustainable era (1997?) and for all of us who can work to create more successful stakeholders here and especially overseas.

  3. Duncan Brown says:

    In terms of the costs angle, the simplest way to think about it seems to me to be:

    A demographic curve – associated with the postwar Baby Boom and the improvement in medical technology – which (without looking at the precise data) probably reached its nadir in the late 1970s and started to climb more rapidly in the 2000s. Before then, we had the costs of educating an outsized number of children; after then we’ve got the costs of pensions and healthcare for an increasingly aged population.

    A costs-of-running-the-country curve (highlighted in the chart on my post), which declined from the 1950s into the 1990s, as the Cold War ended and the debt burden was lowered – first through high growth and inflation, then through orderly budgeting to lower rates. There are no more easy dividends to be had here, and the current situation means a large upward shock to the debt burden.

    My guess is that there were two sweetspots created by the interactions of these two curves: the 1950s and then the 2000s. At these points, especially as they also saw strong growth, there’s a lot of free revenue to be used in spending and/or tax cuts.

    Anyway, I think you’re being potentially too kind about 2017 as a baseline. Much like the 1990s, if you pursue a cheese-paring approach to spending reduction, you get lower nominal spending but you’re accumulating a backlog of work not being done – there’s rationing and infrastructure is in decline. That means future growth (leave aside demographics) quickly gets swallowed up by covering the backlog, not making progress on tax cuts or new programmes.

  4. roGER says:

    I’m a little annoyed and rather surprised that Chakrabortty is the Guardian’s economics leader writer. I wonder if he made a genuine mistake here, or thought he was being clever by giving the editor and the readers what he thought they wanted (which may be true).

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