The public finances under Margaret Thatcher and under the Coalition — compared

By Peter Hoskin
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Yesterday, we published online the column that I wrote for the ConHome conference newspaper last week, headlined "Let's look at the Thatcher years in full, not just in parts". Here, by way of an extended footnote, is something else that I wrote for the newspaper: a comparison of the public finances under the Thatcher governments and under the Coalition. Basically, I've focussed on three important metrics — real terms spending, spending as a percentage of GDP, and the structural deficit (taken here to be "cyclically-adjusted public sector net borrowing", but I shall write more about this tomorrow) — and produced graphs for each three, as well as some bullet-pointed context.

It is, of course, an incomplete picture, and a dozen health warnings should be slapped across it, but hopefully it will still prove useful. As I said in my column yesterday

"...given how some people remember the Thatcher years, a comparison with the current Coalition’s policies may produce surprising results."

Here goes...

Real terms spending

Margaret Thatcher

• Public spending in real terms (i.e. accounting for inflation) rose in every year of the Thatcher Governments, apart from two. As the graph above shows, it was cut by 1.1 per cent in 1985-86 and by 2.3 per cent in 1988-89.
• In today’s money, spending stood at £320 billion when Baroness Thatcher took office, and £376 billion when she left, rising by an average of 1.4 per cent each year.
• Although spending rose consistently in the years to 1985, these rises should be set against a severe recession and the associated increases in social security spending.

The Coalition

• When the distortive, one-year effects of a recent fiscal alteration to Royal Mail pensions are discounted, the Coalition intends to cut public spending for each of the five years from 2010-11 to 2015-16.
• In today’s money, spending is set to fall from £707 billion in 2010-11 to £657 billion in 2015-16, by an average of 1.5 per cent each year.

Spending as a percentage of GDP

Margaret Thatcher

• As a percentage of Gross Domestic Product (GDP), public spending was cut from 44.6 per cent at the start of the Thatcher Years to 39.4 per cent at their end.
• The decrease was more precipitous in the four years from 1984-85 to 1988-89, when spending as a percentage of GDP fell by 8.6 percentage points.
• This latter decrease was due to a combination of post-1985 spending cuts and strong economic growth in the later years of the 1980s. In the years between 1984 and 1988, GDP grew by an average of 4.7 per cent a year.

The Coalition

• The Office for Budget Responsibility (OBR) forecasts that public spending will fall from 47.4 per cent of GDP in 2009-10 to 40.5 per cent in 2015-16. That is, a drop of 6.9 percentage points.
• The decrease is fairly steady, at 1.2 percentage points a year on average, although there is set to be very little reduction this year (2012-13).
• This is despite weaker economic growth than Thatcher enjoyed in the mid- to late-1980s. In March, the OBR forecast average annual growth of 1.9 per cent under the Coalition — and that will almost certainly be lower in their next forecast in December.

The structural deficit

Margaret Thatcher

• Baroness Thatcher inherited a structural deficit (i.e. the deficit that would persist even if the economy was operating at full potential) of 4.8 per cent of GDP, which she had eliminated by 1982.
• The biggest tightening occurred in 1981-82, when a structural deficit of 3.4 per cent of GDP was replaced by a surplus of 1.5 per cent. This remarkable leap was brought about by the 1981 Budget which raised taxes and lowered spending growth as part of the Government’s efforts to tackle rampant inflation.
• After 1982, the structural deficit increased reasonably steadily, to 2.6 per cent of GDP in 1989-90.

The Coalition

• The Coalition inherited a structural deficit of 8.9 per cent of GDP.
• According to the OBR, the Coalition is reducing it steadily — by an average of 1.2 percentage points a year — and it will be down to 1.9 per cent of GDP by 2015-16.