But, as you can see, something else happened around 1974: revenue, which until then had marched up pretty much in line with spending, suddenly started to fall short. Since the middle 1980s it has more or less levelled off, while the gap between spending and revenue has grown.This is not a sustainable situation. At some stage the two lines will have to be brought back into line, as they were before 1974. Note that this is not particularly a British problem, for we are looking here at the G7 countries as a whole, though the gap in the case of the UK has been associated with (and to some extent masked by) a run-down in capital assets rather than a rise in debt – as discussed in the column below.But if you are thinking purely about trends in the size of the public sector, Britain is clearly something of a pioneer in redefining the boundaries.Take another measure of the size of government, the number of people it employs Some trends are shown in the right-hand graph. Most people here are unaware that the peak in the size of the UK’s public sector was in 1976, at 48 per cent of GDP, and that the first moves to roll back the state were taken by Denis Healey. Thus Britain, under Labour, was the first country in the developed world to start reducing the size of the state.The rest of the world has been much slower at doing so.
The graph in the middle shows how public spending for the G7 has carried on rising, shooting up at the time of the first oil shock in 1974, then carrying on a rough upward trend through the 1980s and early 1990s. As the graph on the left shows, Britain’s idea of the appropriate size of the public sector is a half-way house between France and Germany on the one hand, and the US and Japan on the other.But Britain is interesting in another way. It is a change which is also taking place in other western European countries – both France and Germany are developing plans for cutting tax levels.
In the US and Japan there is less evidence of change, but then since they have much lower levels of both taxation and public spending than European countries the issue is less immediate. If taxes should not be increased the size of the public sector cannot increase either. That is a sea-change from five years ago when Labour did believe that an increase in taxation (and of course spending) would bring economic and social advantages.
But stand back for a moment and focus on the implications for the size and role of the public sector. The new orthodoxy in Britain, accepted by both parties, is that taxation should not be increased. The War of the tax posters commenced last week – the “red eyes” and the “Tory lies” – as both main parties accused each other of excessive taxation. Given the arguments about tax in recent months and the importance of the issue at the last election this is completely understandable: tax matters.
