In the United Kingdom, government spending finances a wide range of public services, but it also plays an important role in the national economy, influencing its growth as well as its stability.
This is commonly known as Keynesian economics, a macroeconomic theory that was widely adopted after World War II, and advocates for government intervention in the economy – particularly during economic downturns. During the past century, Keynesian theory has helped shape UK fiscal policy, and today government spending includes several components including current and capital expenditure.
Areas of government spending
General government expenditure will typically fall into one of two broad categories:
- Current expenditure, which covers day-to-day operational and administrative expenses. This spending is necessary to ensure the smooth functioning of public services and institutions.
- Capital expenditure, which covers investments in assets, facilities, and infrastructure projects. This spending typically yields benefits over a longer period of time, and contributes to the improvement or expansion of public services.
Current expenditure examples
Essential public services
Public services are at the heart of UK society. These services range from healthcare and education, to law enforcement and defense. Some may be run by the central government, while others are organised through local governments and authorities. But all of them are made possible through government spending.
Social welfare programmes
Social security and welfare programmes are a significant area of current expenditure. These programmes provide vital support and social protection to people at different stages of their lives. For example, they fund statutory maternity benefits and state pensions, as well as unemployment benefits and housing assistance.
These programmes can take many forms. For example, they may include in-person support, or they may be offered through financial support, such as subsidies, grants, or transfer payments that pay money directly to people, such as those who receive child benefits or a disability allowance.
Interest payments on government debt is another area of current expenditure. When the UK government borrows money to fund various projects and initiatives, it incurs interest obligations on this government deficit.
Capital expenditure examples
Public investment in infrastructure
Government investment in infrastructure initiatives such as road construction, public transportation projects, and energy facilities, is crucial for stimulating economic growth. These projects create jobs, enhance productivity more widely, and improve the quality of life for the people of the UK.
Capital spending on healthcare is also significant, including investments in new hospitals, medical equipment and technology. These investments are essential for ensuring the long-term sustainability and efficiency of the healthcare system, as well as better health outcomes for UK residents.
Capital expenditure in education includes building and renovating schools as well as providing educational resources and technology.
How government funds are collected and allocated
When looking at public finances – both coming in and going out – governments have to balance public service requirements and allocations with responsible fiscal policy.
- Taxation. The majority of government revenue is raised through taxation. For example, tax revenue sources can include a national income tax or corporation tax.
- Inflation control. The government-owned Bank of England sets interest rates with the aim of managing inflation and keeping the cost of living stable.
- Forecasting. Accurate forecasting of government revenue and total expenditure is essential for prudent financial management. Economists and analysts use data and models to predict future economic activity, trends, and government finances, helping policymakers to make informed decisions.
- Prioritisation. The government works to prioritise its spending to address the most pressing needs first, and to achieve its policy objectives.
Looking at the bigger picture
When examining public expenditure, it can be helpful to consider public finances within a broader scope. For example, discussions about the UK’s public services are often mentioned alongside the UK’s gross domestic product (GDP), which represents the total economic output of the country.
Viewing government spending as a share of GDP – or specifically, a percentage of total GDP – provides insight into the scale and importance of the public sector within the economy. In the UK, this figure fluctuates each year – particularly during the COVID-19 pandemic – but has been recently hovering around 45%, highlighting the substantial role that the government plays in the country’s economy.
The UK government will also consider its place internationally and compare its public spending to other countries.
“In per-person terms, the UK’s public spending is similar to that of Australia,” the UK Parliament explains in its August 2023 publication, Public spending: a brief introduction. “The UK is far from unusual in its spending among developed economies, either in the amount that it spends per person or relative to the size of its economy – its spending as a percentage of GDP is fairly typical amongst OECD (Organisation for Economic Co-operation and Development) members.”
However, it’s also important to look at the economy more generally and consider public finances within that context. For example, the UK is currently facing a number of financial challenges that could impact public finances:
“Post-Brexit uncertainty has declined somewhat due to the Windsor Framework agreement to resolve disputes around the Northern Ireland Protocol,” explains the International Monetary Fund (IMF) in a 2023 report. “Still, the economy faces several challenges. The post-pandemic recovery was disrupted by the sharp energy price shock due to Russia’s war in Ukraine; labour force participation has declined, mainly on account of rising long-term illness; and large policy rate increases – needed to arrest high and sticky inflation – have tightened financial conditions.”
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