Yesterday, the starting pistol was fired on five weeks of election campaigning. Much of it will debate government spending, and where the money should come from.
What is public spending?
Government in the UK provides a wide range of benefits and services. All the money spent in this way is counted as public spending, whether it is done by central, devolved or local government, or through the health service, schools, agencies and quangos. Only publicly owned businesses are excluded.
The graph above shows how public spending has changed over the past four decades and under different governments.
Where does the money come from?
Most public spending comes from taxes (income tax, taxes on corporate profits, value added tax, and so on). Government also collects all sorts of other things like customs duties, passport fees, prescription fees, fuel duty, national insurance.
Some government or public bodies also earn money by selling their products and services. So, for example, the police might charge football clubs for policing their matches.
Governments also borrow money, and this is one of the issues that comes up a lot in debates about public finances. How much can or should governments borrow, and for what purposes?
What is the government debt and deficit?
These two terms often come up can get confused, even by some senior politicians who ought to know better.
The difference between what the Government brings in from taxes and other sources in a year and what it spends is the deficit. If it is lucky, there is a surplus. But it is most often a deficit.
Governments borrow money to make up the deficit and this is the Government’s debt. The debt grows, or shrinks, over the years depending on a number of factors, like the size of the annual deficit, interest rates, and the rate of inflation. This means governments can, sometimes, run permanent deficits but still reduce the national debt.
Where does the money go?
Roughly two-thirds of what the Government spends goes on the provision of services like hospitals, social care, schools, the police, the armed forces, roads, and lots more.
The other third goes on what are called “transfers” (payments of money directly to people). The biggest transfers go on pensions for the elderly, and support to people who are unemployed, disabled, have children or have problems paying for housing.
Some of these payments are often called “welfare benefits”, but what constitutes benefits often depends on your point of view. Some view pensions as an entitlement rather than a benefit, for example, since people have paid national insurance for all the years they were working. But some people who have never paid national insurance still get some financial support in old age.
Who actually hands out the money?
In the UK, most of public spending is paid out by the Treasury, the central government ministry in charge of the money. Some is spent directly by central government, but a lot goes also through other public bodies like the devolved government in Scotland, Wales and Northern Ireland, local government, the NHS, education, the police and so on.
In this respect, the UK has quite a centralised system for handling public money — many other countries have much more decentralised systems where money is collected, and spent, more locally.
Politicians seem to use lots of different ways of talking about public spending?
They do. Most often to put a positive spin on what they are claiming. They all do it.
So, if they want to claim they are spending lots on money on something they think the public will support, like the health service, they will often say things like we are spending an extra £10 billion over the next five years. Which sounds better than saying we are spending an extra £2 billion pounds a year.
Or they may claim to be spending more, but only by not taking into account the effects of inflation in prices. If prices have gone up by, say, 3%, then the Government would need to spend £103 to get what it got for £100 last year. If they only spend £102, they are spending more in cash terms, but they are actually funding less services than they did in the previous year.
This briefing is produced by The Day in association with ENGAGE Public Policy.
- Should paying tax be a pleasure?
- Make your own public spending plan. List your spending priorities and allocate percentages to each one, from the largest at the top to the smallest at the bottom. Make sure they add up to 100!
- These are part of government departments and usually provide government services rather than decide policy. For example, the prison service.
- Partly self-governing organisations outside of the Government, that are still partly controlled by it or receive money from it.
- Customs duties
- A tax charged by the Government on imported and exported goods.
- National insurance
- A tax system in the UK paid by workers and employers for funding state benefits, including pensions.
- Extra amount.
- Interest rates
- Interest is what you pay for borrowing money, and what banks pay you for saving money with them. Interest rates are the percentage of the amount you borrow or save over a year. If you put £100 into a savings account with a 1% interest rate, you’d have £101 after a year. The most important interest rate in the UK is the Bank of England’s rate of interest that influences how much interest high street banks offer to customers.
- Rate of inflation
- The rate at which prices increase over time, causing the value of money to fall.
- A pension is a fund into which workers pay amounts of money during their working years, and then draw money from to support them in retirement.
- Having a right to something.