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Public spending and GDP

The following chart shows how public spending varies with GDP in the UK:

Data slightly smoothed
The Labour governments of the 1970s massively increased public spending.  This was associated with a small decline in GDP and two fairly severe periods of low growth.

The Labour governments of the 60s and 70s had the sense to decrease spending when it was obvious that GDP was being adversely affected.  The 2005 Labour government was briefly cutting spending until Gordon Brown and Ed Balls took over.  Brown and Balls, from 2005 onwards, well before the world recession, decided to crash the economy.  They did this on purpose.

Their friends in the BBC are saying that we should have a "plan B" which involves increasing public spending massively.  They report on financial events by asking "is it time that the government 'stimulated the economy' by increasing public spending". Look at the data above.  What do you think will happen if public spending is increased?

It is obvious from the data that public spending should not exceed about 40% of GDP.

When public spending grows the private sector part of GDP declines (see Sydenham's Law of public expenditure and economic growth. ).  This means that increasing public spending is dangerous, it can cause a decline of economic activity and make us all poorer.  Whenever public spending is increased its effects must be carefully monitored.

If you do not believe that there are idealogues in the Labour Party who want to wreck Britain read: The Roots of New Labour.

The more numerate reader might have spotted that if GDP declines then public spending will automatically increase as a percent of GDP.  To analyse the effect of the public sector on the economy the changes in actual public spending (not % of GDP) must be compared with changes in the non-public sector.  When this is done we get Sydenham's Law: Increases in the public sector nearly always accompany decreases in private sector growth.  Notice in the graph below that except for Black Wednesday increased growth in public sector spending causes a decrease in private sector growth.  Public sector spending is what is known in business as an "overhead".

The most important lesson to be drawn from the past 50 years is that there is no evidence that increasing public spending increases private sector growth. This does not happen.



(Click on the graph to view full size).  Every time public sector spending goes up the private sector goes down, Keynesianism never happens, increased public sector spending never increases private sector growth.

Labour buys votes by overspending on the public sector and the media and electorate are daft enough to think you can do this with impunity.   The public sector does not trade.  The ideal level of public sector spending is around 40% of GDP, if this is not sufficient to provide the services and overheads that people want then the only solution is to increase GDP by increasing private sector growth.  There is no other way.  There is no magic porridge pot.

Be sure of one truth, Labour do not act in good faith.  Also be certain that the Tories do not act in good faith although their plans are better for the economy - but not society.

See

Sydenham's Law of public expenditure and economic growth.


Is Labour right?

Public spending and GDP

Is Labour any more than the Public Sector Party?

Does public money stimulate the economy?


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