Monday, 11 October 2010

Should government spending grow with GDP?

A commenter on the Telegraph blogs recently suggested that if government spending had only grown with inflation since 1997, we wouldn't need to pay any Income Tax at all. I decided to check the numbers.

According to, total public spending was £318 billion in 1997. Run this through an RPI-based inflation calculator, and you come up with a figure of £450 billion in 2010

The actual expenditure for 2010, according to, is estimated at £661 billion. That's a difference of £211 billion, more than the 2010/11 expected take for Income Tax and Corporation Tax combined (£188 billion).
Of course, Gordon wasn't concerned with antiquated notions like living within our means, so we're currently facing a deficit of £167, expected to drop very slightly to £163 billion in 2010/11.

So, if spending were rolled back to 1997 levels, we couldn't really afford to do away with Income Tax, but we could entirely eliminate the deficit and still abolish Corporation Tax.

To abolish Income Tax, we'd have to roll the clock back to 1992, when public spending was £236 billion (equivalent to £350 billion today).

National Insurance is really just Income Tax by another name. To eliminate it too, while balancing the books, we'd have to roll the clock back to 1970, when the government spent £22 billion (equivalent to £260 billion today).

How low could it go?

In 1900 the government spent £265 million, equivalent to £24 billion today. If spending had been kept at those levels, council tax would suffice to cover it. We'd have to pay for more of our own education and healthcare but we'd have plenty of money with which to do it. And without VAT, Corporation Tax, employers NI, and excise taxes, all of the goods and services we currently enjoy would be significantly cheaper.

Policing expenses may rise as the population grows, but national defence costs the same whether we have 38 million people to protect or 65 million.

Does it really make sense for government spending to rise as the country gets wealthier? Or should the tax take be fixed in real terms, to cover the essentials, with increasing wealth kept by those who generate it?


  1. I couldn't resist going a bit further back ...

    1850: £56 million (equivalent to £5.6 billion). £5600m / 65m people = £86.15 per person, per year (£7.20 per person, per month).

    1750: £7 million (equivalent to £1.2 billion). Back then, 83% of spending was on defence. The yearly tax bill per household would be £46.

    Scarcely believable. Makes me wonder if I've made a mistake somewhere.

  2. Of course, defence spending has risen faster than inflation (£44 billion in 2010), but there's no doubt that much of it is wasted.