Key findings

  • The size of the state has shrunk and then expanded since 2010, ending up in a similar place to where it started. Total government spending fell as a proportion of the economy from 46.5 per cent in 2009-10 to 39.5 per cent in 2018-19 – the equivalent of £1,500 per household in today’s money. The size of the state has risen since then reflecting political choices and the big shocks that have hit the country so that such spending now stands at 44 per cent of GDP, not far off the pre-austerity peak.
  • But since 2010 the shape of the state has changed significantly. There has been a fall in day-to-day spending on public services: on a real, per-person basis, day-to-day spending on public services is set to be 6 per cent below 2009-10 levels in 2024-25. This has been partially offset by the rise in debt interest, which has nearly doubled from 1.8 per cent of GDP in 2009-10 to 3.2 per cent in 2024-25.
  • Spending pressures have led to a rise in taxes – but not enough to stop debt rising. Increases in taxes have offset over 90 per cent of the rise in total public spending since 2019. As a result, public debt is set to increase by 15 percentage points of GDP between 2019-20 and 2024-25, the second largest rise over a parliament since the Second World War, and the largest rise in the G7 (to 2023).
  • The uncertainty surrounding the fiscal outlook dwarfs sums involved in political arguments made in the campaign. Although the outlook is uncertain, if bad news for the new government arrives on additional costs (for example for compensation for the victims of infected-blood products), higher market interest rates, and even a modest downgrade to the OBR’s assumption around trend growth could leave a £12 billion gap against commitments to get debt falling.
  • The £19 billion of cuts to unprotected departmental spending – from Justice to Local Government – pencilled in for after the election, will be extremely challenging to deliver given the current state of public services. If the next government wants to avoid a return to austerity-style cuts, this implies that around £33 billion of savings would be needed to get debt falling as a proportion of GDP.
  • All this leaves the next government facing a difficult fiscal outlook. Some options have been proposed as part of the wider fiscal debate if uncertainty turns into bad news after the election. Two examples include: tweaking the fiscal rules to one based on total public debt and asking the Bank of England to move to a system of ‘tiered’ reserves remuneration.
  • It is likely, however, that winner of the election will still face difficult choices about how to manage these challenges. But the debate so far has focused on the funding of relatively small policy commitments with much less on these far more material, big-picture fiscal challenges. All this means that the fiscal debate has become detached from the fiscal reality.

Further reading

Capital gains
Public investment priorities for the 2025 Spending Review
·
Zachary Leather, Felicia Odamtten, Cara Pacitti, James Smith
At your service?
Why the 2025 Spending Review must reckon with the distribution of public service use
·
Camron Aref-Adib, Emily Fry, Zachary Leather
Unsung Britain bears the brunt
Putting the 2025 Spring Statement in context
·
Camron Aref-Adib, Mike Brewer, Molly Broome, Alex Clegg, Nye Cominetti, Adam Corlett, Ruth Curtice, Emily Fry, Zachary Leather, Jonathan Marshall, Cara Pacitti, Simon Pittaway, Hannah Slaughter, James Smith, Imogen Stone, Greg Thwaites, Lalitha Try
Charlie McCurdy
Charlie McCurdy Economist
Cara Pacitti
Cara Pacitti
James Smith
James Smith Research Director