Introduction

All OECD states in the twentieth century have experienced a transformation in the economic role of the state and, in particular, a huge growth in public expenditure. The objective of this session is to examine a dataset on British public expenditure since 1900 and to consider the various means of presenting and explaining this growth in expenditure.

Resources

All the data for this class is in the resource file EH087.XLS: public sector expenditure and receipts, GDP and the GDP deflator 1900-79. Background details of this dataset, and a survey of public sector growth in Britain since 1900, can be found in Middleton (1996). For general reading on public expenditure, see Heald (1983).

Exercise 1: constructing a line graph of total public expenditure (TPE) at current and then constant prices

Begin by copying the resource file to your master floppy disk, saving the file using the standard rules for filenames.

Then construct a line graph of TPE at current prices for 1900-79 (col. H of your worksheet), as below. This shows the extent of growth after the Second World War but very little detail beforehand. It is also much affected by inflation: the real growth of public expenditure was far less pronounced.

You can demonstrate the effect of inflation by adjusting the nominal values for TPE by the GDP deflator (col. T of your worksheet). (For the derivation of real values, see Glossary of statistical terms). Construct a line graph for 1900-79 which charts the nominal and real values (as in Chart 2). As you can now see inflation has a very marked affect on TPE, and once you discount for this the growth of the public sector has been much less pronounced this century.

Exercise 2: charting public expenditure with a reference point and log scaling

This second graph is certainly a rather more satisfactory way of presenting the growth of British public expenditure. But it doesn't really give us a reference point against which to assess this growth and, of course, is subject to the standard problem of scaling. GDP is the conventional reference for public expenditure while a log scale allows judgements to be made about comparative growth rates. Thus chart both TPE and GDP at current prices with the Y-axis set to the log scale (as in Chart 3). Construct a normal line graph, then set the Y-axis to the log scale (Alternatively select line graph sub-type no. 6; for more on the logarithmic scale, see the Glossary of Statistical Terms).

The other way in which GDP is used as a reference point is by calculating the expenditure ratio: TPE as a percentage of GDP. Do this, replicating Chart 4. This brings out the impact of the two world wars and shows the upward trend of public expenditure in relation to GDP. But not all public expenditure is actually consumed by government, much of it is transfer payments. Again, we may therefore be overstating the growth of the public sector.

Exercise 3: understanding the growth of government: composition and trend

Government consumption is the two categories:

• Current expenditure on goods and services, often known as PACE.
• Gross capital formation, that is fixed investment.

The remainder of TPE is transfer payments: that is funds received from general taxpayers and then transferred to other groups in the form of unemployment benefits, interest on the national debt, etc.

To the right of your worksheet construct labels which accord with the categories of public expenditure in cols. (B)-(H) but are in relation to GDP. Then for each new column insert the formula that will express public expenditure and its components as a percentage of GDP. Once you have a full set you will need one final column: TPE less PACE and public capital formation. This will then measure the transfer payments element. Then construct an area graph, with PACE as the first series, public capital formation as the second and transfers as the third (as in Chart 5). The topmost line will then accord with TPE as a percentage of GDP and you will be able to see the changing composition of public expenditure. In particular, you will be able to see that transfer payments have increased enormously this century and the effects of the nationalization programme in the late 1940s.

The final graph (Chart 6) should contain actual and trend values - the latter obtained as you did in exercise 1 of week 8 (this time, click the box under Options to display the equation on the chart) - of TPE as a percentage of GDP. You will see from the value given for the X-coefficient that on average the expenditure ratio rose by 0.43 percentage points per annum.

Exercise 4: elasticity measures

There is a further way in which we can express the growth of expenditure in relation to GDP: the elasticity measure. Using the formula in ESHCALC2.xls calculate the elasticity of public expenditure growth against GDP growth for the following periods:

• 1900-13
• 1924-37
• 1951-79
• 1900-79

Which sub-period saw the most pronounced growth of public expenditure? In that sub-period, which category of expenditure accounts for that growth? (Give figures to back up your conclusion).
 

References

Heald, D. (1983) Public expenditure: its defence and reform. Oxford: Basil Blackwell.
Middleton, R. (1996) Government versus the market: the growth of the public sector, economic management and British economic performance, c.1890-1979. Cheltenham: Edward Elgar.

To final additional exercise.

 
 
 
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(c)R. Middleton 1997. Last modified 30 June 1998.