Sunday, November 14, 2010

Spending Your Money


The short version

We assume everyone watched Martin Durkin's spirited assault on Big Government last week (clip above and you can watch again here).

But discussing it with various people since, Tyler has been struck by how few actually realised that government is now spending more of our money than it allows us to spend ourselves*.

Say it again - government is now spending more of our money than it allows us to spend ourselves.

According to the latest OECD stats, this year the UK government will spend an astonishing 53% of our national income. That's the figure quoted by Durkin in his film, and also the figure we show on BOM's sidebar (it relates to so-called General Government, comprising both central government and local authorities).

So - just to hammer home the point with an outsized mallet - for every pound we earn as a country, the government spends 53 pence of it, leaving us with just 47 pence.

And our government is spending more of our income than the government of virtually any other major economy, and way more than the OECD average:


Greece and Ireland, those notorious fiscal basket cases?

Yup, you guessed it - their governments are actually spending less than ours (48.8% in the case of Greece, and 46.9% in Ireland).

Now for some unfathomable reason, HMG does not admit to such a high percentage in its own figures. In fact, George's June budget reckoned the percentage of GDP spent by government this year will "only" be 47.3% (2010-11).

But as we've blogged before (eg here), there are some serious doubts about the official HMT figures. In particular, some of their spending figures are included net of receipts (eg spending on public sector pensions). We'd rather trust the OECD numbers which conform to an internationally agreed and monitored standard.

More fundamentally, the HMT figures calculate the government's share as a percentage of GDP at market prices, rather than the much more meaningful - and lower - GDP at factor cost.

Que?

In plain English, GDP at market prices is measured including the taxes government levies on goods and services, including VAT. Thus, the more government taxes our spending - by for example increasing VAT to 20% - the higher is GDP at market prices. Which means that government spending as a percentage of GDP is correspondingly reduced.

Or in other words, by increasing spending taxes, HMG can manipulate down its own share of GDP.

GDP at factor cost excludes such sales taxes and gives a much truer measure of our real national income, and the share taken up by government.

BOM's old friend Prof David Smith has spent his entire distinguished career monitoring Big Government (or Leviathan as he prefers to call it - see clip above). And he has calculated his own measure of government's share in GDP, measured at the more meaningful factor cost. Here's one of his charts showing what happened over the last century:


Take a moment to study that chart (click on image to enlarge).

A hundred years ago, before WW1, government spent 10 - 15% of our national income, and private citizens got to spend all the rest - ie the money they'd earned. But in the following 70 years, successive governments grabbed more and more, so that by the early 80s they were spending over half our national income.

There then ensued nearly two decades of real struggle under Thatcher, Major, and Prudence, to rein back. Even so, government's take never fell below 41.8% (touched briefly in 1999).

Over the last disastrous decade, of course, it's been one-way traffic. Nay More Boom 'n' Bust Brown let rip, we hit the inevitable bust, and once again we find ourselves with government spending more than half what we earn.

Now let's all remember that simple fact. And let's all try to make sure we tell others around us.

And next time some self-serving Big Gov type pops up on telly saying we could solve the fiscal problem by increasing taxes, feel free to shout at him/her.

The problem is not too little tax.

The problem is too much government spending.

*Footnote - It should be noted that the OECD's 53% figure covers all categories of government spending, including transfer payments (mainly welfare benefits and increasingly debt interest payments). That of course is normal fiscal accounting practice, as also applied by HMT. It shows the proportion of our national income spent by the government. Now, clearly we aren't saying it all goes on direct consumption by the government, because around one-third of it goes on those transfer payments, which the government routes into somebody else's pocket. But the key point is that the government is taking 53% of national income away from those who have actually generated it. For sure, the government then hands a chunk of it out to citizens it considers deserving, but that shouldn't detract from the essential point. The burden on those famous wealth creators (via current and future taxation) is 53%.

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