UK public expenditure Patterns of change Maurice Mullard and Allan Reese University of Hull

Theory of Public Expenditure 1 Explaining Public Expenditure growth Wilensky (1974) Castles (2001) : Expenditure and GDP: economic development relates to public expenditure Klein (1976) : Growth State idea private and public consumption Contrast with Galbraith or Downs private affluence and public squalor

Theory of Public Expenditure 2 Social Policy argument expenditure demand-led demography : longevity number of children in schools Expenditure has its own momentum

Politics - the 50s Emergence from post-war austerity Welfare state: cradle to grave security Redevelopment of infrastructure Defence: cold war and attempted world role End of empire: wind of change

Politics - the 60s and 70s “Politics does not make a difference” Rose (1984) Mapping out complex political events – idea of a Butskellite Consensus Governments’ anti-inflation strategy; influence of trade unions; social contract IMF visit of 1976 – break with Keynesian thinking

Politics - the 80s and 90s Escapable & inescapable expenditure – current versus capital components State versus individual responsibilities Mapping out … the Thatcher years the Major government the Blair government

Data series in this research Social security Education Health Housing Defence Law Roads Trade & industry Environment Agriculture

Example series: Education (adjusted to billions of )

Series grouped in Categories Personal Education Social security Health Housing Security Defence Law Infrastructure Roads Trade & industry Environment ( Agriculture )

“Personal” expenditure total (billions of 2000 pounds)

Programmes prone to change Environment, Roads, Trade & Industry Issues of subsidies Shifts in industrial policy Via’ing between categories of spending

Character of programmes Robust programmes difficult to change in the short term: education, health, social security Relative soft programmes: housing prior to 1974 used in anti inflation strategy after 1974 no longer a political priority Defence – the enabling programme

The Research Question 1. public expenditure decisions represent an internal budget process changes in education expenditure represent a relation to other expenditure programmes: zero sum argument 2. or decisions are externally decided may depend on GDP for current or previous years 3. or decisions are politically driven Politics does makes a difference: Labour and Conservative demonstrate different policy priorities

Time-series Analysis Data have internal correlations Annual series covering 50 years Already adjusted to “real terms” (at 2000) Still show systematic gross changes Fit trend line rather than take differences Residuals from trends retain “local” autocorrelations - within period of office

Social Security total - regression fits

Social Security Residuals (from quadratic)

Alternative analysis Trends or year-on-year differences? Differencing removes all autocorrelation Local ACs may represent “policy” Differenced ACs represent “laws of nature” Education here shows classic autocorrelation of Box-Jenkins AR(1) model

Next stage No necessary periodicities –Can we detect business or political cycles? De-trended series should be stationary Look for cross-correlations Do changes relate to GDP? Look for internal structures - via’ing

Displaying cross correlations eg, defence & education

Correlations between series Defence Health Environment Trade Housing Law Health Roads Trade Social Education Housing Social Health Environment Housing Env’ment Law Roads Trade Housing Social Roads Defence Health Trade Trade Law Education Health Roads Housing Social Social Law Health Roads

Correlation needs investigation Education & Health ( no lag )

So what happens with GDP? GDP may lead (enabling factor): Education, Health, Housing May in turn be led by (stimulated growth): Environment, Roads But negative relationship with: Defence, Law NO simple relationships with Conservative/Labour as a dummy variable

Explaining cross-correlations Idea of clusters Programmes that move in the same direction winners and losers Trade-offs Politics does make a difference In the way the government reacts to events?

Social Security & Trade

Health enabled by Defence

Housing enabled by Defence

Health - accelerating growth

Health as percentage of GDP

Rise and fall of Housing (TBA)

Housing total as percentage of GDP

Housing transfers & capital as percentage of GDP

Environment current & capital as percentage of GDP

Trade transfers & current as percentage of GDP

Graphing three-way split Three components that add up to 1 (or 100%) contain just two pieces of information They can be plotted in 2-D on an equilateral triangle Can look for clusters of points or a pattern of movement (locus) over time

Triplot - division of spending

What can we see in Education? Capital up Subsidy upCurrent down Capital fast down Subsidy up Current up Capital down Current up Capital upCurrent down Since 1997 Current up

Comments on Stata Analysis + graphics Command-driven –audit trail –production line use Very versatile Extensible (like Unix) Widely used and with good user support Note irregular scales and axis labels Combinations of points and lines Graphs are built up by adding options to basic commands Good books + online documentation