Size of the state has grown over this parliament and is likely to remain permanently bigger than pre-pandemic

Under this parliament, the size of the state – spending as a proportion of national income – has increased by significantly more than under any previous post-war Conservative parliament. A large part of this increase looks to be permanent. By 2028–29, the state will be larger than before the pandemic, than before the financial crisis, or than the post-Second-World-War average.

A new election report from researchers at IFS, funded by the abrdn Financial Fairness Trust and the Nuffield Foundation, looks at how the size and scope of the state have changed since the 1950s – and how it is expected to change in the next parliament. It finds that:

• The state was the same size in 2019–20 as it was in 2007–08, on the eve of the financial crisis, with spending representing around 40% of national income. In other words, almost a decade of ‘austerity’ simply returned the size of the state to where it had been after a decade of New Labour governments.
• The composition of spending changed substantially between 2007–08 and 2019–20. Spending on health grew by around 1% of national income, while spending on education fell by a similar amount. Spending on social security benefits also fell, following cuts to the generosity of working-age welfare.
• The 2010s saw large contractions in the size of the state after the financial crisis, accompanied by relatively weak economic growth. In real terms, the 2009–10 to 2014–15 parliament saw the slowest period of spending increases since the Second World War.
• Under the 2019–20 to 2024–25 parliament, spending has grown by 4.5% of national income (£124 billion in today’s terms). Four-fifths of this increase was not anticipated before the pandemic.
• Since 2019, spending on both debt interest and social security has risen much faster than expected. Debt interest spending was expected to fall as a share of national income, but has in fact risen by 1.5% of national income (£41 billion) over this parliament. Social security spending was expected to be stable, but has risen by 1.2% of national income (£33 billion). Lower-than-expected economic growth has also contributed to public spending taking up a bigger portion of total output. Much of the rise in spending looks unlikely to be transient.
• The size of the state is set to settle at higher levels than its pre-pandemic average: in 2028–29, spending is forecast to be 42.5% of national income, 2.9% (£80 billion in today’s terms) above pre-pandemic levels. Partly this is a result of persistently higher debt interest spending, but even excluding this the size of the state is larger.
• Health spending is likely to continue to rise and, after decades of cuts, so is defence spending. Without a cut in the scope of what the state does, given demographic and geopolitical pressures, an overall increase in the size of the state will be hard to avoid.
• And even these forecasts are built on spending plans that could be described as unrealistically low. They imply real-terms cuts to day-to-day spending for ‘unprotected’ departments – including local government, higher education, courts and prisons – of between 1.9% and 3.5% each year. These areas are already under visible strain. The forecasts also imply real-terms cuts to investment spending. Protecting these areas from cuts in 2028–29 would require a further top-up to spending plans of around £30 billion, and would mean a further increase in the size of the state, to 43.4% of national income.

Bee Boileau, a Research Economist at IFS and an author of the report, said:

‘Whoever takes office after this election will have a choice. They can cut the scope of what the state provides, or accept further worsening of public services which already look under strain. Or they can raise taxes, or borrow more, in order to top up spending and maintain real-terms levels of departmental funding.

Neither the Conservative Party nor the Labour Party has been clear about which of these options they would take. Neither has shown any ambition to cut the scope of the state. Both have ruled out increases in major taxes. Both have committed to a debt target that would prevent them from borrowing more. But, absent really significant improvements in growth forecasts, one of these options must be chosen. The trade-offs here cannot be solved by denying their existence.’

Mubin Haq, Chief Executive of abrdn Financial Fairness Trust, said:

‘Long-term demographic trends, increased expectations for public services and higher debt interest payments mean that public spending is set to increase in relation to national income, and seems likely to remain at a higher level going forward. This growth in the overall size of the state is despite the majority of government departments having lower real-terms funding than before austerity. Essential services are likely to face further cuts and pressures on them will intensify. There are difficult choices to be made by whoever forms the next government, whether that is raising taxes, increasing borrowing or cutting what we can get from public services.’