Costing Britain – falling productivity in the public sector

Since 1999-00, public spending has increased at an unprecedented rate. Between 1999-00 and 2007-08 (the end of the 2004 Spending Review period), public spending is projected to increase by 39 per cent in real terms – an increase of 4.9 per cent of GDP. The increase in spending has had two consequences: a sharp increase in the tax burden and in borrowing.

With regard to taxes, following a decline in the tax burden to 35.6 per cent of GDP in 2002-03, the tax burden is planned to increase very quickly. By 2008-09 it will reach 38.3 per cent of GDP, its highest level for 24 years.

According to the Chancellor’s “Golden Rule”, the current budget must stay in surplus over the economic cycle. As Table 3 shows, the Treasury’s estimate for the current budget has worsened in each of the last three Budgets. In April 2001, the Treasury’s forecasts meant that the Golden Rule would be met with ease. In April 2004, the Treasury’s forecasts meant that it would be met with no margin for error.