What does the government spend money on?

The government spends huge amounts of money each year on our behalf. In 2022–23, UK government spending was almost £1,200 billion, or around £17,000 per person. This was equivalent to around 45% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more. Apart from the first year of the COVID-19 pandemic, when government spending reached a high of 53% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more, this is the highest level of spending as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more for the last 40 years, and is above the post-war average (of around 40%).

Two-thirds of spending is on public services

The total amount of money that the government spends each year is called total managed expenditure (TME). This can be broken down into a number of broad components. Around two-thirds of the total is ‘day-to-day’ spending on public services, such as the NHS, schools and prisons. Around a quarter of all spending is on social security, such as universal credit and the state pension. The remainder can be split into (net) interest costs on government debt (around 8% of the total in 2022–23) and government investment (around 5% of the total). The chart below shows how spending on each of these components has changed over time. One notable trend is a more than doubling of social security spending as a share of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more. Another is that after falling steadily for 40 years, debt interest costs sharply increased in 2021–22 and 2022–23. In 2022–23 spending on (net) debt interest amounted to 3.8% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more, more than two-and-a-half times the level in 2019–20, on the eve of the pandemic (1.4%).

Components of spending

Another way to break down overall spending is into areas, or ‘functions’, of government. This is done in the pie chart below. Health spending is the largest single area of government spending, representing almost £1 in every £5 spent. The next-largest areas are social security spending on pensioners (largely the state pension), social security spending on working-age adults and children (including universal credit and disability benefits) and spending on education. Together, health, social security and education account for half of all spending. 

Health spending is growing

The major trend of the past 70 years has been a steady increase in the share of national income devoted to government spending on health and a corresponding decrease in the share of national income devoted to defence. Between 1955−56 and 2022–23, health spending increased from 2.8% to 8.4% of UK GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more. This rise was offset by a fall in defence spending from 7.6% to 2.2% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more. This ‘peace dividend’ allowed the government to spend more on health without increasing the size of the state.

But the speed with which defence spending has fallen has slowed in recent years. The UK government pledged to spend a minimum of 2% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more on defence as part of its NATO commitments in 2014, creating an effective floor for the defence budget. More recently, in response to Russia’s recent invasion of Ukraine, governments across Europe – including the UK’s – have announced increases in defence spending. Rishi Sunak has set out an ‘ambition’ to increase defence spending to 2.5% of GDPGross domestic product (GDP) is a measure of an economy’s size. It is the monetary value of all market production in a particular area (usually a country) in a given period (usually a year).Read more in the longer term, which – if achieved – would start to reverse the downwards trend seen over the last 70 years. 

We see similar trends if we instead look at spending as a share of total managed expenditure, as in the table below. Health spending has grown steadily to account for an ever-increasing share of total spending. At the same time, the share devoted to defence has fallen, but at a slowing rate. Some other areas of spending, notably education, have been relatively stable over this period, while the share of spending devoted to areas such as housing has fallen.

As the population ages, spending on healthcare, long-term (social) care, and pensions seem likely to continue rising. It could be that, for the first time in a long time, the defence budget needs to grow at the same time as the health budget. Without curtailing other areas of spending, or radically paring back the scope of what government does, it seems highly likely that overall government expenditure and the size of the state will increase over the next decade.