Keynesian, or inefficient?

Hamish McRae says “the Government has not been a net contributor to growth for the past 18 months.” He’s referring to Friday’s GDP figures, which show that the output of government services was lower in Q1 2010 than it was when GDP peaked in Q1 2008. This is the first two-yearly fall since records began in 1983.
Giles says: “this recession has not seen a Keynesian spending splurge.”
You might wonder what the hell is going on. 
There are three “headline” measures of government activity, which my chart shows.
One is the output of government services - health, defence, education etc - which shows up within the output measure of GDP.
Another is government consumption, which comes in the expenditure measure of GDP.
And a third is overall central government current spending, which is reported in table PSF3 of the public finances; in my chart, I’ve deflated this by the GDP deflator.
And here’s the queer thing. The correlation between annual changes in these three measures is low; no higher than 0.26 since 1984Q1.
How come? One reason is that central government spending includes debt interest and welfare payments, which the other two don’t.
Another reason is that government consumption includes spending on procurement which is excluded from output. If Whitehall were to buy a ton of paperclips and leave them in Horse Guards Parade, consumption and current spending would rise, but output of government services would not.
Similarly, if public sector productivity were to fall for any reason output of government services would drop whilst consumption didn’t.
And this is what seems to have happened. Between 1983 and 2008, government consumption and output rose at much the same rate in real terms. Since 2008, however, consumption growth has outstripped output growth. This is consistent with what the ONS tells us - that public sector productivity has fallen,
Does this mean Giles is right to say the government hasn’t been Keynesian? In one sense, no. Between Q1 2008 and Q4 2009 (the latest available) real government consumption rose 4.7% and real central government current spending rose 13.5%. This is Keynesian. To him, remember, even wasteful spending - paying men to dig holes and fill them in again - was counter-cyclical.
In another sense, though, Giles is right. Whether you look at consumption alone or real current spending generally, growth in the last two years has been no higher than in the early 00s. In this sense, the government has not been Keynesian. 

Comments

[Luis Enrique]

if you looked at govt. spending as % of GDP, might things appear a little more Keynesian still?

[Giles]

Yeah, but I would take against Luis' approach there. Have a vanishing divisor and of course spending looks like a huge increase. But why is the baseline "same % of GDP"? Since the object is to add up components of GDP, I think such an approach would be misleading. For a start, it means that if an economy craters - say, half GDP is wasted in some disaster - and government spending falls by only 25%, the '% of GDP' method shows an INCREASE - i.e. a Keynesian splurge.

I think Chris puts it exactly right; our govt kept things from getting worse by not (attempting to) mimic the private sector's manic dissaving - but it did not do a Keynesian boost any greater than normal increases in consumption.

[Luis Enrique]

Giles,

gpwm ... I had thought that merely holding govt spending steady whilst the denominator collapses was Keynesian after a fashion, at least compared to letting G shrink in proportion to Y, but on second thought, that's not the right way to look at things, the right way is in absolute levels, not % GDP.

[Econoclast]

Isn't the point that the government engaged in a Keynesian spending splurge in the shallower recession of 2001-2003? It then - fatally - assumed that tax revenues had risen to a permanently higher level and didn't scale back spending during the boom. The story of the recession is a collapse in tax revenues, not a spending splurge.

[vimothy]

There was (effectively) no stimulus, just the automatic stabilisers. Net spending necessarily increased, and this is counter-cyclical. But we gave all the spare cash to the financial sector.

Next stop, some hopefully mild delfation. It's the consequence of living beyond one's means, don't you know!