In the aftermath of the financial crisis, government spending as a share of national income reached a peak not seen since the mid-seventies – mainly because the cash spending plans set out prior to the crisis were largely kept to despite being predicated on growth that did not materialise in the end.
A decade of austerity later, spending has been brought back to pre-crisis levels. Public sector receipts have been much more stable than spending but have increased slowly and today stand at their highest share since the mid-eighties.
The gap between spending and revenues is the deficit. As spending has been brought down and revenues have slowly grown, this gap has started to close, but has not disappeared entirely. If on the other hand, we focus just on current or day-to-day spending and ignore investment spending, then there was a small surplus in the last financial year. For the first time in seventeen years, the UK government has not borrowed to finance its day-to-day spending.
However, the headline deficit – including borrowing to fund investment – is not particularly low by historical standards: At 1.9% of national income in the last financial year, it stands exactly at its long-run average between the Second World War and the onset of the financial crisis. In addition, the large deficits run during the Great Recession have left a mark of the stock of debt owed by the UK public sector, which more than doubled as a share of national income since 2007 and has only recently, and very gradually, begun to fall, remaining at 81.7%.
Despite this doubling of debt, record low interest rates have caused the cost of servicing the UK debt to fall, rather than rise over the same period. Spending on debt interest currently stands at 1.8% of national income, or £37.5 billion in nominal terms, compared to 2.0% of national income in 2007–08.
Figure 1. Tax and spend over the last two decades
Source: Office for Budget Responsibility, ‘Public finances databank’, 05 November 2019, https://obr.uk/data/
