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​Graphic: 70 years of UK public spending​

Author: ICAEW Insights

Published: 19 Apr 2023

Our interactive graphic tracks the lows, highs, and even higher highs of UK public spending since World War Two.

UK public spending exceeded £1trn for the first time in 2020/21 and, as a percentage of GDP, spending has hit heights not seen since World War Two. The pandemic had an obvious impact, but demographic trends in the UK have been exerting a longer-term influence. So, how exactly did we get here? 

Our interactive graphic looks at changes in spending as a percentage of GDP between 1950 and 2021. It also breaks down how government expenditure in five key areas – health, welfare, defence, education and pensions – has changed over the years.  

Between 1950 and the mid-1980s, total public spending remained largely stable at around 35% to 40% of GDP, although the mix of spending shifted as the defence budget shrank and the welfare state expanded.  

From the second half of the Thatcher years, spending steadily decreased to around 30% of GDP as privatisations shrank the state, immigration increased and the economy grew at a faster rate than spending. It remained in the low 30s until the global financial crisis, when weaker economic growth combined with stalling productivity and spending grew to 40% of GDP, despite efforts to constrain the rise through various austerity measures.  

Public spending then leaped to more than 50% as the pandemic impacted economic growth and necessitated emergency interventions from the state, before falling back to 45% as the pandemic quietened and the cost-of-living and energy price crises arrived. 

The latest five-year forecasts from the Office for Budget Responsibility indicate that public spending should come down to 43% of GDP by 2027/28, although this is based on assumptions of further cost-cutting by the government.  

Until now

For James Evans, economic historian at Lincoln College, University of Oxford, the biggest impact on post-war spending comes from a reorganisation of the state and how successive governments approached social change.  

“When the war ended, the UK had this idea that if you want to address certain social issues like health or housing, you had to do them all together. So, if you wanted to deal with housing, then you also had to deal with unemployment, too. That takes the social service contract of the new liberals of the early 20th century and puts a jetpack under it. It changes our spending trajectory from then on,” he observes.  

With the post-war global economic boom, suddenly there was rapid growth in public spending in sectors such as welfare (more than doubling from 2.73% of GDP in 1951 to 6.18% in 1981) and pensions (2.92% of GDP 1950 to 4.2% in 1980).  

However, sectors such as defence have seen a steady decline in public investment from post-war highs of around 10% to just 2% by the mid-90s, where it has remained relatively constant since.  

The 1950s and ’60s are now seen as a golden era of British growth, with the fastest-ever increase in real-terms GDP per person. Living conditions improved, wealth inequality declined and job security was relatively high.

“The period around the 1950s and ’60s saw high growth and industrialised work sustain social mobility. That generation, as they have got older, have reaped the benefits of a very unusual moment in time when growth was high and the state was interventionist,” says Evans.  

Those decades of growth have had knock-on effects that affect modern-day decisions around public spending. When the state pension was introduced in 1948, the average age of death for a man was 65 and a woman was 70, according to the Office for National Statistics. For children born in the 1970s, life expectancy shot up to 79 if male and 83 if female.

As a result, government spending on pensions, which stood at around 2% of GDP in the 1950s, is now more than 8%. The introduction in 2010 of the triple lock – which mandates that the state pension increases by the highest of inflation, average earnings or 2.5% every year – has made pensions one of the biggest financial commitments of the British state.  

Likewise, increased longevity has had an impact on healthcare spending, which hovered around 4% of GDP between 1950 and 1990, before steadily increasing to 7% in 2020 and jumping above 10% post-pandemic.  

What next?

Other forms of demographic change have also impacted Britain’s spending. Evans cites Brexit’s negative impact on the number of EU workers in the UK – who typically gave the UK their most productive labour years before leaving – as increasing the strain on services such as the NHS.  

Accounting for this extra spending is possible during times of high economic growth, but Britain’s current economic challenges means increasingly difficult decisions on “how to carve up a smaller and smaller pie” are having to be taken.  

“The UK is in the Catch-22 position of not being able to invest enough to grow the economy because it is not generating enough economic growth to be able to afford to do so,” says Martin Wheatcroft, external advisor on public finances to ICAEW. 

“The prospects are that both tax and spending will gradually ratchet upwards as pensions, health and social care costs rise in line with an ageing demographic and welfare provision continues to be extended, as seen with the childcare announcement in the 2023 Budget. Governments no longer have the cushion provided by being able to raid other budgets such as defence to cover rising costs in other areas, especially as the security situation deteriorates, and austerity reaches its limits.” 

As the spending infographic illustrates, the UK was able to afford a large expansion in health and welfare provision until the global financial crisis, without increasing the burden on the taxpayer. Health and welfare spending rose significantly, but the economy grew even faster and defence spending fell. Today, the situation is reversed, and public finances are in a much weaker position following successive economic crises. 

The ageing population and expanded welfare state will continue to exert pressure on public finances, causing spending to rise further in the medium-term and taxes to increase in the absence of a significant improvement in economic conditions.