Monthly Archives: March 2015

The golden rule of British government spending

As the British general election approaches politicians can be expected to produce more economically illiterate rubbish than usual.

Take, for example, the recent stories about British government spending returning to the levels of the 1930s. Sounds horrible doesn’t it? Except it isn’t remotely true. What might happen is that government spending returns to the share of national income it was in the 1930s. As national income is many times higher now than it was then, so will government spending be.

But take a look at this


Source: The Guardian

It’s self explanatory I hope. But what strikes you about it? It’s the stability of the line, how constant the share of its income the British public is willing to hand over to its government is*. Whether the top rate of income tax is 83%, as it was in the 1970s, or 40%, as it was in the years before 2010, the British people seem to have decided in some mysterious way that 35% of their income is all the government is going to get**.

And that means, more or less, that 35% of national income (GDP) is all the government can spend unless it wants to pile up debt. If government spending is much above that level, as it is, it will have to fall no matter who is in charge. If government spending is much below that level…well, we’ll see when that happens.

The bottom line is that the number that matters for the fiscal debate in the British general election is not 1930 but 35.

* The mean is 35.1%, the median is 35.3%.

** Two of the three lowest years, 1965-1966 (31.6%) and 1966-1967 (32.5%), were under Harold Wilson’s first Labour government and the two highest, 1981-1982 and 1984-1985 (37.6%), were under Margaret Thatcher’s Conservative government.

EDIT: The Cap X blog made a very similar point to the above a couple of weeks later.