Darling, take an axe to public spending

By Allister Heath, December 9, 2009

If you want to know in just how big a mess we are in, do not bother wading through the Chancellor’s figures.

Instead, you should consult a fascinating report put out every six months by the OECD, a think-tank for all the rich countries.

Its latest Economic Outlook includes a prediction which nobody in Britain has picked up but which is extraordinarily important: in 2010, public spending will reach no less than 54.1 per cent of our economy.

The private sector — you and I and private firms — will spend just 45.9 per cent, which means that we will technically no longer be a proper capitalist economy.

And just in case you think these figures are plucked out of thin air, the OECD thinks public spending will already have reached 52.4 per cent of GDP in 2009.

To put all of this in perspective, public spending was 40.6 per cent of GDP when Labour was elected in 1997, falling to just 36.6 per cent by 2000 after several years of strong economic growth and Tory-inspired public sector spending plans.

It was around that time that Gordon Brown started to crank up spending, which began an inexorable rise during the boom years before exploding out of control when the economy ground to a shuddering halt in 2007.

Only five developed countries — France, Sweden, Finland, Belgium and Denmark - will have proportionally larger government sectors than Britain next year, and in every case only marginally so.

In stark contrast, the US government will spend 42.8 per cent of its economy next year, Australia 37.4 per cent and Korea 33.7 per cent.

There is plenty of evidence that big government nations suffer weaker economic growth and more subdued job creation over time once all other factors are accounted for.

The state spends money very inefficiently and diverts resources away from capital spending into consumption.

Our bloated government will also require massive tax hikes after the next election: the recent explosion in public spending in Britain has come from borrowed funds rather than from extra tax receipts.

This is unsustainable, as Alistair Darling, as well as the Tories know full well.

There is no doubt that the economy is slowly improving. But unless an axe is taken to public spending, an excessively large government will condemn Britain to years of high taxation, economic decline and general misery.

Allister Heath is Editor of City A.M.

Last updated: 4:24pm, December 9 2009