After a decade of big public spending cuts, why was there still a deficit pre-Covid?

London Austerity Protest June 2014 – Source: David B Young Wikimedia

The pandemic has led to another big increase in public spending and growing pressures for more austerity. Understanding the last decade might help our thinking about the coming decade. An important question is why, after a decade of cuts, total public spending (pre-Covid) continued to be higher than revenue, ie there remained a deficit.

The last decade has been one of deep austerity. After the financial crash of 2008-09 public finances deteriorated rapidly. The economy shrank by 6% from the first quarter of 2008 to the second quarter of 2009 and the public spending deficit rose to 10.1% of GDP (ONS).

It is common knowledge that the incoming Conservative-led government of 2010 embarked on a programme of drastic cuts in public services. Apparently there was no alternative – the country had ‘maxed out on its credit card’. The result of this, according to Polly Toynbee and David Walker in their 2020 book “The Lost Decade 2010-2020 and What Lies Ahead for Britain, has been a “dark and fractious” decade of austerity. Drawing on data from the Institute for Fiscal Studies, Toynbee says that “every citizen has lost 25% in public spending”.

The IFS, not known for political hyperbole, also called it a decade of austerity. They said

“Day-to-day spending on public services was down 7% in real terms (13% per person). Outside of health, real terms public service spending was cut by 20% (25% per person) over the decade to 2019-20. This has been the longest sustained squeeze on public spending on record”.

NB: The higher increases per person reflect the population increase from 62.8m in 2010 to 67m in 2019.  

Despite these austerity cuts there remained a deficit – total public spending continued to be above public revenues. The deficit did fall from a high of 10.1% of GDP in 2010 to 1.9% in 2019 (Parliament report; ONS). But pre-Covid, the deficit in 2019-20 was about the same as it was before the financial crisis (in 2007 it was 2.7%). As the IFS said, “despite these cuts, on the eve of the pandemic, government spending as a share of the economy … was the same as in the mid-2000s”.

If public spending cuts have been so dramatic since 2010, why is spending still higher than revenue?

Did revenues fall?

One explanation might be that revenues fell. Tax cutting is a fundamental political belief of the Conservatives so this would be no surprise. But a glance at the figures shows that this is not the case. Tax revenues as a proportion of GDP have stayed more or less constant since the mid-2000s at around 36.8% to 37.8% (with the exception of a fall to 35.8% during the 2009 recession) (Parliament report; ONS).

Did total spending fall?

Surely a decade of austerity implies that total spending fell. However, in real terms (2019-20) spending increased from £858.8bn in 2009-10 to £881.4bn in 2019-20 (HM Treasury, Public Expenditure Statistical Analyses, Table 4.3).

Nevertheless, this increase is very small compared to previous decades. According to the IFS real terms increases in total public spending averaged 3% (of GDP) per year from 1955 to 2010. The last decade’s increase averaged only 0.3% and was “the slowest of any decade on record”.

Why the cuts when total spending increased?

The question therefore is why were there cuts when total spending increased? Have some areas of public spending been cut significantly while others increased?

‘Paying off the deficit’?

An obvious reason why overall public spending has increased might be that we have been ‘paying off the deficit’. This is a commonly heard but misleading expression. The deficit is the difference between total public revenues and spending over any one period, often a month or year. Deficit can be reduced or increased, but it is debt, not deficit, that is ‘paid off’.

Total accumulated debt, the ‘national debt’, has gone up significantly, from 34.6% of GDP in 2007 to 84.2% in 2019 (ONS). This higher debt has meant more spending on debt interest.

However, the increases in debt interest have been very small compared to total public spending. Debt interest spending was £53.8bn in 07-08, £66.4bn in 2011-12 and £57.8bn 2019-20 (HMT, PESA, Table 4.3). These increases were only 1.5% of public spending in 2011-12 and 0.6% in 2019-20. The money has been available at very low rates of interest and over long periods (much of it won’t be repaid for decades). This far from accounts for the big cuts.

Cuts to maintain health spending?

A key to understanding the cuts in “day-to-day spending” (variously from 7% to 25%) while total spending has been maintained is that day-to-day spending represents less than half of total public spending. It is government departmental current expenditure and includes for example, the courts, police, prison services, legal aid, tax collection, environmental protection, recreation and culture, transport, education and health. Also included is central government funding of local government services such as housing, libraries, youth services and road maintenance.

All this amounts to about 36% of total spending. Other spending is departmental capital expenditure, about 7% of total (which also fell over the decade), and a separate category of spending referred to as “annual managed expenditure”, which is about 57% of total (and did not fall).

The 7% cuts in day-to-day spending amount to £22.8bn (2.6% of total spending). The 20% cuts (£45.8bn) referred to by the IFS exclude health.

Health has been a protected spending area, but the increases were not big. In fact from 2010 to 2013 health spending was barely maintained in real terms (in 2009-10 it was £139.2bn, in 2012-13 it was £140.5bn) (HMT, PESA, Table 4.3). Real terms health spending increased in the later years of the decade, but overall the increase was £24.9bn from 2009-10 to 2019-20 averaging about 1.5% per year (and with a population increase of around 0.7% per year, the increase in health spending per person was not much above zero).

An increase in social protection spending?

“Social protection” (unemployment, sickness, housing, pensions and other benefits) is a large area of public spending (31.2% of total spending in 2019-20) and is mostly in the “annual managed expenditure” category.

It grew significantly from 2008 to 2012 (by about £40bn) (HMT, PESA, Table 4.3), much of which was the result of increased social security payments after the financial crisis. However, it fell back later in the decade (by £13bn) as working age benefits were cut. Over the decade as a whole real terms social protection spending increased by only £10bn, averaging about 0.35% per year. This also masks some significant differences between working age benefits, which fell in real terms later in the decade, and retirement benefits which have just about been maintained.

Net effects

Day-to-day spending cuts in non-health areas in the decade to 2019-20 have been £45.8bn. This is 20% lower than spending in 2009-10, and about 5.2% of total spending in 2019-20. As Toynbee and Walker document in their book, the cuts in a wide range of spending areas, especially local government services, have been big and devastating for those affected. The deficit continues because these cuts have been matched by some real terms increases in health, social protection, and debt interest.

But the increases in health and social protection were small compared to the cuts because between them they were a much larger portion of total spending than day-to-day public services. They amounted to around 47% of total spending in 2009-10 and 50% in 2019-20 in contrast to 20%-26% for the other public services. Health and social protection have not been lavished on – the increases were significantly less than in previous decades.

Main spending changes 2009-10 to 2019-20 (real terms 2019-20):

Day-to-day public services (excluding health)Down £45.8bn, 20% lower (5.2% of total 2019-20 spend)This was about 26% of total spending in 2009-10. It fell to 20% in 2019-20
HealthUp £24.9bn, 17.9% higher (2.8% of total 2019-20 spend)This represented a small increase averaging about 1.5% per year
Social protectionUp £10.9bn, 4.1% higher (1.2% of total 2019-20 spend)Later in decade, working age benefits fell, while retirement age benefits were maintained
Debt interestUp £7.9bn, 15.8% higher (0.6% of total 2019-20 spend)Despite the increase, it remains very small compared to total spending

Could the cuts have been avoided? What increase in tax revenues and/or the deficit would have been required to avoid them? Even if real terms spending in every area could have been maintained, would it still have been a difficult decade? With debt racking up again do we face another decade of austerity? These questions are addressed in a follow-up to this article.

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