In a previous post – Measuring Leviathan: Big Government and the Myths of Public Spending – I tried to explain and explore some of the mythology that has grown up around public spending and – probably more importantly – put forward some ideas about how we ought to think about public spending. I used the past 50 years or so of UK public spending to illustrate my points. It especially showed some things that people generally find very surprising about the last Labour government.

An academic colleague posted a response, which I quote in full below. I have chosen to respond in full because this comment rather helpfully illustrates many of the problems I was trying to clarify. So apologies to my colleague if this seems like an ‘attack’ (or strictly speaking ‘counter-attack’) – it is meant in a constructive way and to further the debate. Anyone else is welcome to join in.

Here is the comment:

“Many things can and are claimed about the last Labour government but I think it is difficult to sustain the argument that its public spending was lower than any government since the 1960s. Figure 4 is not very accurate as it averages very different levels of spending within a government. What is clear from your figures is that in real terms spending under Labour was much higher and in some ways that is more illustrative than percentage of GDP which is dependent on the growth of the economy. Also as figure 3 shows, spending as a percentage of GDP was on a downward trend under the Conservatives but on an upward trend under Labour. So Labour’s finishing point in 2010 was much higher than the Conservatives in 1997. Labour shackled themselves to Conservative spending plans for two years in 1997 and so in the context of a growing economy spending was bound to go down as a percentage of GDP but after the first two years spending increased rapidly, and as you say, especially in health and education. Unlike previous Labour Governments, after 1997 New Labour were not constrained by the danger of a run on sterling.”

Let me deal with all these points, one at a time.

Many things can and are claimed about the last Labour government but I think it is difficult to sustain the argument that its public spending was lower than any government since the 1960s.

The crucial phrase here is “lower than any government since the 1960s”. The question is simply, by what measure? As I pointed out in my original blog post, if you measure public spending in either nominal or real terms then almost any government can be shown to “spend more” than the last one. My argument is that, despite it’s short-comings, comparing public spending with a measure of national wealth (I choose GDP) is the only sensible way of studying long-term and comparative trends in public spending. If there is an alternative – propose it, rather than just reject something that seems counter-intuitive.

‘Seems’ is the important word – there is a widespread belief, spread by New Labour themselves, their political opponents, and the media, that the last Labour government spent a lot – too much or the right amount, depending on who you are – on public services. But a belief, even a widely held one, is not necessarily reality. What my analysis showed was that – in historical terms New Labour, prior to the Global financial Crisis, did not spend vastly more on public services as a proportion of national wealth. That is what the numbers show, quite clearly, whether or not some people “believe” otherwise.

Figure 4 is not very accurate as it averages very different levels of spending within a government.

Firstly, Figure 4 is completely accurate. What you seem to be challenging is not its accuracy but its utility. Because it “averages very different levels of spending within a government”, you seem to be saying, it is not really very useful. Actually, what it averages is spending as a proportion of GDP, which is rather different, but let’s assume that was just a slip. What is the use of averaging public spending as a proportion of GDP for a whole government? Well, I think Figure 4 rather makes the point – it shows that, in one respect at least, some of the popular mythology about governments over the past 50 years is highly inaccurate. Labour and Conservative governments were not that much different, and when they were it was in often unexpected ways. The story is thus obviously far more complex than the simplistic Labour equals big spenders, Tories equals small spenders, myth. There may be very good, and very interesting explanations of why the numbers appear as they do – and that is the purpose of ‘good’ numbers in my view – to act as a ‘can-opener’ to asking more penetrating and interesting questions.

You are correct that average spending over a government can hide important facts. For example, a government that started out with very high spending and ended with very low could have the same average spending as a government that started out with ‘average’ spending and continued like that throughout its term in office. That is why we need to look more closely at what happens within a governments’ period of office – which I have done frequently elsewhere and will do more of in my book ‘Strategy in Government – from growth to austerity’ (out next year, hopefully).

But that doesn’t negate the utility of at least looking at governments’ spending as a whole during their term in office – and the best measure of that is their average spending as a proportion of GDP. Again, if there is a better one, please propose it.

What is clear from your figures is that in real terms spending under Labour was much higher and in some ways that is more illustrative than percentage of GDP which is dependent on the growth of the economy.

I’ve already answered this, but to reiterate: virtually any governments real terms spending will be higher, on average, than the last ones. I already made the point about GDP, growth and its effects on spending/GDP ratios in the original post, but in my view that doesn’t negate it’s utility as an analytic device.

Also as figure 3 shows, spending as a percentage of GDP was on a downward trend under the Conservatives but on an upward trend under Labour. So Labour’s finishing point in 2010 was much higher than the Conservatives in 1997.

I hate to point out the intellectual inconsistency of saying in the previous sentence that real-terms spending is a better measure than the spending/GDP ratio, and then relying precisely on the latter to make your very next point.

You also ignore your own (correct) point about the spending/GDP ratio being dependent on both spending and growth (or recession). New Labour’s higher spending/GDP figure in 2010 was due almost entirely to the GFC effects on the wider economy, not to any sudden increase in spending. True, Labour could have chosen to immediately slash spending in line with the recession in the private sector (i.e. by about 6% of GDP). I leave you to make your own estimates of the effect that would have had.

However, and here is my central point, Labour’s pre-GFC figure for spending/GDP is below the long-term average and, even while growth in the economy was continuing, had levelled off in 2004-07.

Labour shackled themselves to Conservative spending plans for two years in 1997 and so in the context of a growing economy spending was bound to go down as a percentage of GDP but after the first two years spending increased rapidly, and as you say, especially in health and education.

This just reiterates a point I have made frequently on Whitehall Watch, in repeated evidence to the Treasury Select Committee, and elsewhere. Again, I’ll be exploring this further in my new book.

Unlike previous Labour Governments, after 1997 New Labour were not constrained by the danger of a run on sterling.

True. But I’m not sure what you’re point is with regard the previous discussion?

I hope this rather long response serves its purpose: which is to try and explain, and explore, what sorts of measures we should be using in the debate on public spending. I realise I haven’t covered lots of issues (taxes, borrowing, etc) which I will do (and have done) elsewhere. My main mission is to try and change the terms of debate away from impressionistic, and often misleading, myths towards more clear analysis based on the actual facts about public spending in the UK and elsewhere.