The provisional estimate of GDP growth in the first quarter of 2010, at just 0.2 per cent, suggests Britain is having a weak recovery from the recession. Even if the figures are later revised up, it is unlikely there will be a significant improvement on the 0.4 per cent recorded in the previous quarter. New TaxPayers' Alliance research looks at the evidence that higher spending leads to lower economic growth and suggests that the increase in spending over the last decade is already seriously depressing trend growth.
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Academic and official research suggests that higher government spending is associated with lower economic growth. That means the rapid rise in spending since 2000 – far greater in the UK than in other developed economies – may be seriously affecting Britain’s trend rate of economic growth and GDP:
• Over the last decade, there has been a rapid increase in government spending. OECD figures show that the UK increased total government outlays from 36.6 per cent of GDP in 2000 to a projected 53.4 per cent in 2010. That is a 45.9 per cent increase against a 15.7 per cent increase across the developed world.
• Treasury figures suggest that Total Managed Expenditure has risen from 36.3 per cent of GDP in 1999-00 to 48.1 per cent in 2010-11. Based on European Central Bank research estimates of the effect of spending increases on growth, that increase in spending may be reducing the trend rate of growth by 1.53 percentage points.
• The same analysis suggests that GDP in 2010-11 is already £111 billion lower than it would have been without the increase in spending since 2000. That is equivalent to over £4,000 per family.
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Matthew Sinclair, Research Director of the TaxPayers' Alliance and editor of the new book How to Cut Public Spending (and Still Win an Election) said:
“The Government are relying on the economy growing strongly over the next few years to make their sums for the public finances add up, but a well established body of evidence suggests that growth isn’t going to come without serious cuts in the high spending that has built up over the last decade. Families are already worse off by thousands of pounds a year thanks to Brown’s spending hikes getting in the way of growth. If the parties are going to prove themselves responsible candidates for government, they have to start setting out credible plans to cut spending and get the economy and the public finances back on track.”