How to shrink the state

Steve Barclay, the Prime Minister’s chief of staff, says he wants to “restore a smaller state”. This is mere virtue signalling.

For one thing, the Tories’ actual behaviour shows no appetite for a smaller state. Quite the opposite. They oppose drug legalization; have authorized the security services to commit crime; and are seeking to suppress protest.

But there’s something else. It’s that if you are serious about cutting government spending as a share of GDP you need much more than libertarian instincts. You need a strong economy.

My chart shows the point, showing total managed expenditure as a share of GDP since 1955-56.

It’s not easy to discern from this alone any great political changes. Yes, the share of government spending in GDP rose in the 1960s as social democracy became more entrenched, and also grew during the second New Labour administration from 2001 to 2005. But it also rose in the early years of the Thatcher administration – from 41.5 per cent in 1978-79 to 43.3 per cent in 1982-83. And it fell in the first few years of the New Labour government. Few, though, would argue that Thatcher believed in bigger government and Brown in smaller.

Instead, what stands out more are economic booms and slumps. Government spending rose as a share of GDP after the oil shock of 1973; during the recessions of the early 80s and 90s; during the financial crisis of 2007-09; and during the pandemic. And it fell during the booms of the late 80s and late 90s.

The state of the economy is a stronger determinant of the share of public spending in GDP than is the ideology of the government.

We can put this more formally. The OBR has estimates of the output gap going back to 1972-73. Between then and 2019-20 (that is, just before the pandemic), the correlation between that gap and the share of TME in GDP was minus 0.4. A weak economy means a higher share of government spending, and a stronger economy a smaller share.

By contrast, the relationship between the share of TME in GDP and dummy variable measuring whether the Tories or Labour are in government is statistically insignificant. Which tells us that the state of the economy matters more for the size of government than does which party is in government.

Now, you might think that the output gap is a bad measure. I’d agree. But another measure tells a similar story. If we look at five-year changes in real GDP and in the share of public spending in GDP we also see a negative correlation. For the TME share it was minus 0.43 between 1955-56 and 2019-20. And for the share of current spending in GDP it has been even stronger, at minus 0.56. If we look only at the post-1973 period – that is, to exclude the Golden Age of strong growth, the correlations have been stronger, at minus 0.61 for the share of TME in GDP and minus 0.63 for the share of current spending. And these figures exclude the pandemic year, and so understate the correlation for the whole period.

I’m not very numerate – though am more so than many MPs – but I do know that a fraction comprises two parts, a numerator and a denominator. You can reduce a fraction therefore not by reducing the numerator but by increasing the denominator. And history tells us that this has been the main way in which state spending shrinks as a portion of GDP.

If you are serious about shrinking the state, you need to do more than wave Hayek and Nozick at us (or, Gawd help us, Ayn Rand). What you also need is stronger economic growth.

Which brings us to a problem. The Tories cannot deliver this, for four reasons:

 - Brexit red tape is reducing trade and depressing GDP. Free trade agreements with other countries are unlikely to offset this damage.

 - They are still austerians, as we are seeing with Sunak and Johnson’s promise to raise NICs even during a cost of living crisis. The OBR foresees cyclically-adjusted net borrowing falling from 8.3 per cent of GDP this fiscal year to 1.5 per cent by 2026-27. That means weaker growth and hence a still-high share of public spending in GDP: the OBR forecasts that even in 2026-27 TME will be over 41 per cent of GDP, much higher than it was during the New Labour years before the financial crisis.

 - Tories electoral interests militate against promoting growth, even if they knew how to do so. A stagnant economy fosters reactionary illiberal attitudes and hence support for their culture wars.

 - Tory supporters’ and donors’ interests are antagonistic to faster growth. Policies to promote growth would hurt rentiers – such as shifting incomes from incomes to property, liberalizing planning laws or promoting competition. And higher trend growth would probably entail higher real interest rates, thus hurting rentiers still more.

If you are sincere about wanting to shrink government spending as a share of GDP, you cannot support the Tory party as it currently exists. Given the party’s lurch towards illiberalism, however, you cannot support Labour either.

Comments

[rsm]

Didn't the period held up as desirable, late 80s to dot com crash, result in yuppies and increasing inequality? Don't your periods of shrinking state result in increasing private power, then some market panic or pretext of an existential threat is used to increase state power again?

Is growth a silly societal goal that has only increased suicides, because despite Ben Friedman's attempts to show otherwise, growth just produces inequality?

[ltr]

https://fred.stlouisfed.org/graph/?g=M5nF

January 30, 2018

United States Federal, State and Local Government Spending as a share of Gross Domestic Product, 1948-2021

[ltr]

The state of the economy is a stronger determinant of the share of public spending in GDP than is the ideology of the government....

[ Really important. ]

[ltr]

If you are sincere about wanting to shrink government spending as a share of GDP, you cannot support the Tory party as it currently exists. Given the party’s lurch towards illiberalism, however, you cannot support Labour either.

[ Having read this essay through yet again, I find the analysis brilliant. ]

[Jim]

Johnson et al have handed Starmer a golden opportunity - the incompetence of Brexit added to having no idea where to take the UK economy. Add in the corruption and dishonesty shown up over the last 5 years hands Starmer the gift of the century.

Starmer can claim Brexit looked like a 'good' idea but incompetently handled, we need housing and probably public housing in quantity like it or not. Do away with so much secrecy until Ministers are more frightened of the courts and the judges and the regulators than they are of the Prime Minister or anyone else.

To achieve this will require a brave electoral strategy - crucify the corrupt, open up Whitehall to bright sunlight. There may be no magic bullet to fix our economy but he can ensure the corrupt and incompetent go hungry and no long live off the public purse.

[Blissex]

«the incompetence of Brexit added to having no idea where to take the UK economy»

The usual hallucination of silly "leftoids" in full display: brexit has had a tiny (but negative) impact overall, and "the economy" (that is, housing cost inflation) is booming.

«we need housing and probably public housing in quantity like it or not.»

I guess that incumbents in desirable areas really need less housebuilding.

«To achieve this will require a brave electoral strategy»

I doubt that Starmer will turn back, throw under the bus "aspirational" affluent propertied tory voters, and campaign to the left of Corbyn to win the votes of the "pushed behind" people and areas.

«the corrupt and incompetent go hungry and no long live off the public purse»

That includes most of finance and most property owners, whose fortunes have been made by the Tresury and BoE "lending" or spending hundreds and hundreds of billions of pounds from the public purse.

[Almar]

The article's comments about the TME/GDP in the early years of the Thatcher and Blair governments do not necessarily have the implication suggested. It is very likely that the reason for the apparently counter-intuitive TME/GDP changes is that it takes a year or two for planned changes in Government Expnditure to come into effect.

[Blissex]

«The article's comments about the TME/GDP in the early years of the Thatcher and Blair governments»

Those have a much bigger issue than just "it takes a year or two for planned changes in Government Expnditure". The dominant aspect of those years was scottish oil output, which was surging massively.

[D]

Surely there's some choices we can make about what the state does and doesn't do that affects the size of the state?

[aragon]

To answer D

Yes, but don't expect any from our current politicians.

First we could redistribute wealth via FDR 'soak the rich' taxes.

Inheritance Tax, Land Value Taxes, Tax Wealth, Tax Capital Gains.

Then their are public works:
e.g. FDR's New Deal 1 & 2.

And more fundamental reforms, I have mentioned before:

Address: Finances creationb o0f currency. Perhaps a (Central Bank) digital currency (Sterling not Bitcoin).

Address: Reject (Not reform) Intellectual Property (Except Trademarks).

Address: Monopoly

Address: Monospony.

Through Anti-Trust legislation.

A Basic Income.

For day (or less week).

Reform of Casual (Gig) Economy.

Onshore resource extraction/production

Invest in Research in Energy, Materials, Technology, and Biology etc.

Invest in Infrastructure (New Deal - N.B Not Green).

I am sure with more effort a better answer could be arrived at, but it won't happen.

Most would involve an expqantion of the state as resources are redirected, but some like abolishing Intellectual Property would shrink the state.

Aim for what K. Eric Drexler calls 'Radical Abundance' through atomic precision manufacture/or Nano Technology.

Fusion energy would be Radical Abundance of Energy.

This contrasts with the Stone Age of the Greens, the Serfdom of the Conservatives and Wokeness of Labour (Red Tories).

You have nothing to loose but your chains!

Now that is a manifesto.

[ltr]

Surely there's some choices we can make about what the state does and doesn't do that affects the size of the state?

[ Good point, and I would argue that now government economic direction is needed more in the UK than in the last 40 years, since Brexit has changed the competitiveness of the economy and public policy will need to compensate. ]

[Blissex]

«Surely there's some choices we can make about what the state does and doesn't do that affects the size of the state?»

Given a certain social environment, the government's choices as to the taxing and spending of the state influence the distribution of living standards far more than the overall level. Rather than support employment and production the Treasury has chosen to spend hundreds of billions on bailing out the City and the property owners, and the BoE have expanded their balance sheet by trillions to gift huge capital gains to the City and property owners. Those have been distributional choices, not about the size of the state.

Regardless, the "size of the state" debate beloved by right-wingers is just distraction tactics: for right-wingers what matters is not how big or small the state is, but who benefits from the big state. Lots of law-and-order, lots of spending to boost property values in the south-east, lots of backstopping finance and property, keeping interest rates low and credit booming, are not exactly small state politics. The usual relevant quotes:

George Osborne: “A credible fiscal plan allows you to have a looser monetary policy than would otherwise be the case. My approach is to be fiscally conservative but monetarily active.”

George Osborne: “Hopefully we will get a little housing boom and everyone will be happy as property values go up”

David Cameron: “«It is hard to overstate the fundamental importance of low interest rates for an economy as indebted as ours… …and the unthinkable damage that a sharp rise in interest rates would do. When you’ve got a mountain of private sector debt, built up during the boom… …low interest rates mean indebted businesses and families don’t have to spend every spare pound just paying their interest bills.”

Is that small-state "laissez-faire" politics? Of course not. It is just "small state for you, big state for us", "capitalism for losers, socialism for winners".

[ltr]

Given a certain social environment, the government's choices as to the taxing and spending of the state influence the distribution of living standards far more than the overall level....

[ Really important argument. ]