The economy may be looking up but the public finances are far from fixed

Ryan Bourne
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ECONOMIC indicators seem to be improving. Yes, there are concerns that the growth we are seeing is “the wrong type of growth”, fuelled in part by government attempts to re-inflate the housing market. But if businesses and consumers believe better times are ahead, the hope is that renewed confidence will foster more investment, thus facilitating a return to on-trend growth (whatever that may now be).

This would alleviate some of the pressure on the public finances by boosting tax revenues and – you would assume – lessening the need for benefit spending. Yet if you want an indication of the sheer depth of the structural mess facing the UK public finances, and just how far there is to go to achieve a smaller and more affordable government, examining trends on the net government dependency of UK households is an interesting proxy.

On behalf of the Centre for Policy Studies, the Office for National Statistics (ONS) has calculated just that. Measuring the proportion of households that receive more in cash benefits and benefits-in-kind (including health, education, and various subsidies) than they pay in taxes (including indirect taxes, like VAT), the ONS provides a useful guide to our underlying fiscal problems.

In 1979, 43.1 per cent of households were net recipients of government, with this figure remaining pretty much unchanged at 43.8 per cent by 2000-01. In between, the number tended to rise in the few years after recessions before falling back to around this mark. But in the run-up to the financial crisis, this figure jumped to 48.1 per cent by 2007-08 as, even in the good years, Labour ramped up benefit and health and education spending on middle-income households. Over a million extra households became net dependents on government in just seven years.

By 2010-11, and the fallout of the financial crisis, a full 3.1m extra households were net dependent on the state than just ten years earlier. Expressed starkly, the average earner in the middle fifth of households went from being a net contributor to government to the tune of £1,083 in 2000-01, to a net recipient of £5,023 in 2010-11.

This phenomenon is not just down to an ageing population either. The same trend is observed if we look at only non-retired households, where the proportion in net receipt from government was 29 per cent in 2000-01, compared to 38 per cent today.

Mercifully, the most recent figures for 2011-12 show that these overall net dependency figures, like other economic variables, are improving. The proportion of net recipients has fallen, for the first time in five years, to 51.9 per cent. But this still means 2.8m more households receive more from government than they pay in compared with in 2000-01. Not time for popping the champagne corks just yet.

This lines up with many other economic variables. Employment is rising, but our employment rate remains much, much lower than pre-recession. GDP growth is picking up, but is still failing to exhibit significant catch-up given the stagnation of the past three years. Things are looking better, but policymakers shouldn’t be satisfied. As Margaret Thatcher once said, “there is so much more to do.”

Ryan Bourne is head of economic research at the Centre for Policy Studies. @RyanCPS