The big government spending items you didn't expect

By Scott Simmonds, researcher


Last week’s budget left many taxpayers speechless. With the Office of Budget Responsibility showing public sector net borrowing will reach £319.9 billion in 2020-21 (pushing public sector net debt to 94.9 per cent), many of us were bewildered at the scale of spending plans. Government departments are set to see a £150 billion a year boost by 2024-25. When you dive into the data, it’s amazing just how much taxpayers’ money goes on some unexpected big ticket items. 


Here are some of the biggest eye-popping outlays:


1. Pensioner benefits – £123.5 billion in 2020-21


Pensioner benefits include payments such as housing benefits, support for disabled people and people with health conditions, and of course the state pension. The cost of these benefits has seen a 3.3 per cent increase since 2017-18, rising £3.9 billion between 2017-18 and 2020-21.


The overwhelming majority of pensioner benefits arrive in the form of the state pension. Since its introduction in 2010, the triple lock has pushed the cost of the state pension to over £100 billion for the first time, costing £101.9 billion in 2020-21. This is an increase of £3.2 billion from 2019-20 and costs more than the savings gained from equalising the pension age between men and women and raising the pension age.



2. Defence spending – £39.8 billion in 2019-20


We certainly haven’t been short of stories about poor defence procurement in recent days, but what makes this waste of taxpayers money even more outrageous is that it’s one of the most costly areas of government. 


Data from the Ministry of Defence shows that £39.8 billion was spent on defence in 2019-20 - an increase of £1.8 billion from a year earlier. Between 2017-18 and 2019-20, defence spending saw an increase of more than £3.2 billion, a rise of 8.8 per cent. 


Since 2006, NATO allies have agreed to spend two per cent of GDP on defence, meaning defence spending can fluctuate with the size of the economy. In 2009-10, defence expenditure was £44.8 billion; this went down to £36.6 billion in 2017-18 before rising to £39.8 billion in 2019-20. Ministry of Defence annual accounts for 2020-21 are currently yet to be released. But we can expect spending to once again come in tens of billions. 



3. Public sector debt interest – £39.3 billion in 2020-21


Despite recent record borrowing, public sector debt interest (the interest paid on government borrowing) has actually fallen in recent years. Debt repayment costs have fallen 29 per cent in four years, from £55.1 billion in 2017-18 to £39.3 billion in 2020-21. 


While this can be viewed positively, there are risks. The UK’s stock of index-linked debt stood at around £448 billion at the end of 2020, making up 24 per cent of the government’s debt portfolio. This means that while public sector debt interest is currently falling, it is vulnerable to sharp increases in the future. Thankfully, it seems the chancellor is also concerned about this, highlighting in his budget speech that “just one percentage point increase in inflation and interest rates would cost us around £23 billion.”  



4. Foreign aid – £14.5 billion in 2020


Since 2015, the UK has been legally committed to spending 0.7 per cent of gross national income (GNI) on overseas aid. As we first pointed out, the financial impact of the pandemic meant the government could reduce the foreign aid budget by 0.2 per cent, from 0.7 per cent in 2020 to 0.5 per cent in 2021. 


UK aid has consistently been above 0.5 per cent of GNI since 2009 and the UK has met the 0.7 per cent target every year since 2013. The reduction in 2021 will lower the overall cost of aid by an estimated 25 per cent. But even with this reduction, the government is still forecast to spend over £10 billion on foreign aid in 2021. 


The 2021 spending review forecasts that fiscal tests will be met to return to the 0.7 per cent rate in 2024-25. Currently, £12.3 billion is budgeted to foreign aid spending in 2024-25 at the 0.5 per cent rate, meaning a potential increase of about £5 billion pounds - to over £17 billion - if a return to 0.7 per cent were to be implemented. 



5. Local government expenditure – £38.4 billion in 2020-21


Local government saw a dramatic increase in support in 2020-21. The £15.6 billion of covid support funding pushed local government expenditure to £38.4 billion, an increase of over 60 per cent compared to 2019-20. If this additional support is excluded, funding given to local government actually fell between 2019-20 and 2020-21. This is consistent with recent trends, with local government funding from central government having fallen by £2.7 billion from 2017-18 to 2020-21. 


Local authorities currently retain 50 per cent of business rates raised locally. This is set to rise to 75 per cent in April 2022 meaning local authorities will have even greater control over the spending of taxes. While overall funding has decreased, local authorities have seen their local share of business rates increase from £14.6 billion in 2017-18 to £16.9 billion in 2020-21 – a rise of 16 per cent. 



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