Sydenham's Law: Significant increases in public spending accompany decreased private sector growth.
The Labour Party say that economic growth can be generated by increasing public spending. Is this true?
A national economy can be compared with a business. In general the private sector runs the immediately profitable parts of the economy and the public sector runs parts of the economy that are overheads. Overheads such as infrastructure, education, welfare and security govern the long term performance of the economy. The public sector part of the economy does not trade so must obtain its money from the private sector as taxes.
So does increased public sector spending ever increase private sector growth? Lets take a look at the actual data since 1950 (click on graphs to enlarge):
The Labour Party say that economic growth can be generated by increasing public spending. Is this true?
A national economy can be compared with a business. In general the private sector runs the immediately profitable parts of the economy and the public sector runs parts of the economy that are overheads. Overheads such as infrastructure, education, welfare and security govern the long term performance of the economy. The public sector part of the economy does not trade so must obtain its money from the private sector as taxes.
So does increased public sector spending ever increase private sector growth? Lets take a look at the actual data since 1950 (click on graphs to enlarge):
 |
| Graph 1: The effect of changes of public sector spending on the private sector |
Most importantly: there is no record at any time in the past 60 years of an increase in public spending increasing private sector growth. If Keynes were right this should have happened once at least.
The chart below is the unsmoothed data for public and private sector growth:
Notice Sydenham's Law in action, whenever public sector growth increases private sector growth falls.
There may be a threshold above which public sector spending will depress the private sector. The most likely threshold is when the rate of growth of the public sector exceeds the rate of growth of the private sector.
The following chart plots the annual change in private sector value and the amount by which the annual change in public sector spending differs from this change in value for every year since 1950: it plots the extent to which public spending exceeds the ability of the private sector to pay alongside private sector growth (click on graph to enlarge):
 |
| Graph 2: Annual changes in private sector and excess change in public sector spending |
Graph 2 shows that whenever public sector growth exceeds private sector growth the private sector growth declines. It happens every time, whenever public sector growth exceeds private sector growth it crashes the private sector and even creates private sector recessions. This relationship is obvious: increases in public sector growth must never exceed the rate of increase of the private sector, whenever this happens it depresses the economy. Governments that think they can stimulate the economy by massive public spending are ignoring what actually happens and what has always happened.
 |
| Is there a magic porridge pot? |
We know that sometimes governments rapidly increase public spending, Gordon Brown did this after 2005. Notice that this had an immediate depressing effect on the private sector. The 2005 decrease in private sector growth was not due to global events, it was made in Britain because the global recession started in 2008. In 2006 the Treasury should have seen the potential crash in the private sector and slashed public spending, instead the public spending continued to recklessly outpace the ability of the private sector to pay until 2010 when the Tories rescued the economy.
If public sector spending is the causative agent then Governments are responsible for recessions. They let public spending get out of control and they take too long to respond. The significant changes in an economy occur within 1-2 years, annual budgets are at too long intervals to provide the necessary corrections.
Private sector growth and public spending excess are incredibly tightly coupled. The moment public spending increase exceeds private sector growth the private sector growth falters. This is not surprising if the extra public spending causes inflation because industrial output has not risen to meet the extra spending. Extra public spending also increases tax rates to pay for interest and debt repayments.
The relationship between UK public spending and the rate of inflation is shown below:
 |
| Graph 3: Annual increase in public spending and inflation Yellow lines: inflation %, Red: increase in public spending % |
“We used to think you could spend your way out of recession and increase employment by boosting government spending… I tell you that option no longer exists. And so far as it ever did exist, it only worked on each occasion… by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.” Jim Callaghan.
The lessons from this analysis are twofold. Firstly no increase in public expenditure seems to have increased private sector profitability in the past 60 years. As a rule rapidly increasing public expenditure seems to depress the economy. Secondly, governments can avoid recessions by ensuring that the rate of growth of public expenditure is always less than the rate of growth of the private sector.
The biggest lesson of all is that Labour are badly wrong about public spending. The empirical evidence is such that we should be incredibly cautious about applying increased public spending as a "band aid" for a failing economy. The increases in public spending over the past 60 years have had a variety of sources from taxation through loans to printing money but the outcome, a relatively depressed private sector, has been the same in every case.
Some readers may be wondering why the idea that you can increase GDP by increasing public spending is almost an orthodoxy. There is no evidence for this in the data:
 |
| UK changes in public spending and changes in GDP |
The total GDP generally avoids the depth of the recessions experienced by the private sector although increases in public spending always eventually depress the economy. The very large increases in spending by the Labour government in the 1960s, early 70s is a good example with overspending being followed by a marked decline.
This analysis does not mean that public spending should be slashed and slashed again. It means that public spending should be carefully controlled so that it does not suppress growth. A modest growth in public spending that is less than the growth in private sector GDP should be sustainable. We can keep the NHS and welfare but great care must be taken not to overspend. You cannot simply spend your way out of a recession.
The best way to govern a country is to keep public spending fairly constant at a maximum of around 40% of GDP and to expand public services by increasing public service efficiency or expanding GDP.
See
Sydenham's Law of public expenditure and economic growth
Public spending and GDP
Sydenham's Law of public expenditure and economic growth
Is Labour right?
Does public money stimulate the economy?
If you found this article interesting link to it, tweet it (TinyURL http://tinyurl.com/b4qq77a ), and tell your friends! How else will they find out that public spending can be fatal as well as kind?
POLITICAL THOUGHTS click here to see the whole POLITICAL THOUGHTS magazine POLITICAL THOUGHTS!
The variables in the graphs are calculated as:
Annual change in public sector spending (%/100) = ((Yr2 Spend - Yr1 Spend)/Yr1 Spend)- inflation/100
Annual change in private sector value(privateGDP) (%/100) = ((Yr2 Non pubGDP - Yr1 NonpubGDP)/Yr1 Nonpub GDP)- inflation/100
Excess public sector spending (%/100) = (Annual % change in public sector - Annual % change in private sector)/100
The raw data:
| Year | Inflation % | GDP £bn | Population Million |
Public Spending % GDP |
Public Spending £bn |
Non-public GDP £bn |
| 1900.00 | 5.10 | 1.89 | 41.21 | 14.06 | 0.27 | 1.62 |
| 1901.00 | 0.50 | 1.89 | 41.60 | 17.25 | 0.33 | 1.57 |
| 1902.00 | 0.00 | 1.91 | 41.97 | 18.34 | 0.35 | 1.56 |
| 1903.00 | 0.40 | 1.88 | 42.33 | 18.41 | 0.35 | 1.53 |
| 1904.00 | -0.20 | 1.88 | 42.71 | 16.43 | 0.31 | 1.57 |
| 1905.00 | 0.40 | 1.95 | 43.08 | 17.82 | 0.35 | 1.60 |
| 1906.00 | 0.00 | 2.03 | 43.46 | 15.18 | 0.31 | 1.72 |
| 1907.00 | 1.20 | 2.11 | 43.84 | 14.44 | 0.31 | 1.81 |
| 1908.00 | 0.50 | 2.01 | 44.23 | 14.78 | 0.30 | 1.71 |
| 1909.00 | 0.50 | 2.05 | 44.61 | 14.73 | 0.30 | 1.75 |
| 1910.00 | 0.90 | 2.14 | 45.01 | 15.95 | 0.34 | 1.80 |
| 1911.00 | 0.10 | 2.23 | 45.40 | 14.97 | 0.33 | 1.89 |
| 1912.00 | 3.00 | 2.33 | 45.13 | 14.78 | 0.34 | 1.98 |
| 1913.00 | -0.40 | 2.42 | 44.87 | 14.97 | 0.36 | 2.06 |
| 1914.00 | -0.30 | 2.45 | 44.60 | 15.61 | 0.38 | 2.07 |
| 1915.00 | 12.50 | 2.94 | 44.34 | 25.72 | 0.76 | 2.19 |
| 1916.00 | 18.10 | 3.43 | 44.08 | 50.85 | 1.75 | 1.69 |
| 1917.00 | 25.20 | 4.28 | 43.82 | 55.70 | 2.38 | 1.89 |
| 1918.00 | 22.00 | 5.11 | 43.56 | 56.64 | 2.89 | 2.21 |
| 1919.00 | 10.10 | 5.48 | 43.31 | 51.17 | 2.81 | 2.68 |
| 1920.00 | 15.40 | 5.98 | 43.05 | 33.22 | 1.98 | 3.99 |
| 1921.00 | -8.60 | 4.91 | 44.07 | 34.05 | 1.67 | 3.24 |
| 1922.00 | -14.00 | 4.46 | 44.27 | 36.39 | 1.62 | 2.84 |
| 1923.00 | -6.00 | 4.25 | 44.47 | 30.16 | 1.28 | 2.97 |
| 1924.00 | -0.70 | 4.37 | 44.66 | 27.21 | 1.19 | 3.18 |
| 1925.00 | 0.30 | 4.51 | 44.86 | 27.17 | 1.22 | 3.28 |
| 1926.00 | -0.80 | 4.35 | 45.06 | 29.89 | 1.30 | 3.05 |
| 1927.00 | -2.40 | 4.60 | 45.26 | 29.56 | 1.36 | 3.24 |
| 1928.00 | -0.30 | 4.60 | 45.46 | 29.17 | 1.34 | 3.26 |
| 1929.00 | -0.90 | 4.69 | 45.67 | 28.23 | 1.32 | 3.37 |
| 1930.00 | -2.80 | 4.62 | 45.87 | 29.38 | 1.36 | 3.26 |
| 1931.00 | -4.30 | 4.32 | 46.07 | 32.06 | 1.38 | 2.93 |
| 1932.00 | -2.60 | 4.22 | 46.28 | 33.08 | 1.40 | 2.83 |
| 1933.00 | -2.10 | 4.30 | 46.50 | 31.93 | 1.37 | 2.93 |
| 1934.00 | 0.00 | 4.52 | 46.71 | 29.21 | 1.32 | 3.20 |
| 1935.00 | 0.70 | 4.72 | 46.92 | 28.56 | 1.35 | 3.37 |
| 1936.00 | 0.70 | 4.99 | 47.13 | 28.65 | 1.43 | 3.56 |
| 1937.00 | 3.40 | 5.33 | 47.35 | 28.62 | 1.53 | 3.81 |
| 1938.00 | 1.60 | 5.50 | 47.56 | 28.87 | 1.59 | 3.91 |
| 1939.00 | 2.80 | 5.92 | 47.78 | 29.14 | 1.72 | 4.19 |
| 1940.00 | 16.80 | 7.18 | 48.00 | 29.71 | 2.13 | 5.05 |
| 1941.00 | 10.80 | 8.65 | 48.22 | 54.08 | 4.68 | 3.97 |
| 1942.00 | 7.10 | 9.48 | 48.42 | 59.80 | 5.67 | 3.81 |
| 1943.00 | 3.40 | 10.09 | 48.62 | 64.37 | 6.50 | 3.60 |
| 1944.00 | 2.70 | 10.18 | 48.83 | 65.45 | 6.66 | 3.52 |
| 1945.00 | 2.80 | 9.91 | 49.04 | 70.34 | 6.97 | 2.94 |
| 1946.00 | 3.10 | 9.97 | 49.24 | 64.81 | 6.46 | 3.51 |
| 1947.00 | 7.00 | 10.77 | 49.45 | 51.84 | 5.58 | 5.19 |
| 1948.00 | 7.70 | 11.97 | 49.66 | 39.21 | 4.70 | 7.28 |
| 1949.00 | 2.80 | 12.73 | 49.87 | 36.00 | 4.58 | 8.14 |
| 1950.00 | 3.10 | 13.31 | 50.08 | 35.89 | 4.78 | 8.53 |
| 1951.00 | 9.10 | 14.78 | 50.29 | 38.01 | 5.62 | 9.16 |
| 1952.00 | 9.20 | 15.98 | 50.54 | 39.07 | 6.24 | 9.74 |
| 1953.00 | 3.10 | 17.12 | 50.78 | 38.41 | 6.58 | 10.54 |
| 1954.00 | 1.80 | 18.13 | 51.03 | 36.24 | 6.57 | 11.56 |
| 1955.00 | 4.50 | 19.49 | 51.28 | 34.95 | 6.81 | 12.68 |
| 1956.00 | 4.90 | 20.96 | 51.53 | 35.10 | 7.36 | 13.60 |
| 1957.00 | 3.70 | 22.11 | 51.79 | 34.55 | 7.64 | 14.47 |
| 1958.00 | 3.00 | 23.05 | 52.04 | 35.12 | 8.10 | 14.95 |
| 1959.00 | 0.60 | 24.35 | 52.29 | 35.21 | 8.57 | 15.78 |
| 1960.00 | 1.00 | 25.98 | 52.55 | 35.20 | 9.14 | 16.83 |
| 1961.00 | 3.40 | 27.41 | 52.81 | 37.60 | 10.31 | 17.11 |
| 1962.00 | 4.30 | 28.71 | 53.11 | 38.31 | 11.00 | 17.71 |
| 1963.00 | 2.00 | 30.41 | 53.42 | 38.31 | 11.65 | 18.76 |
| 1964.00 | 3.30 | 33.23 | 53.73 | 38.35 | 12.74 | 20.49 |
| 1965.00 | 4.80 | 35.89 | 54.03 | 39.35 | 14.12 | 21.77 |
| 1966.00 | 3.90 | 38.19 | 54.35 | 40.04 | 15.29 | 22.90 |
| 1967.00 | 2.50 | 40.28 | 54.66 | 43.43 | 17.49 | 22.79 |
| 1968.00 | 4.70 | 43.66 | 54.97 | 43.73 | 19.09 | 24.57 |
| 1969.00 | 5.40 | 47.02 | 55.29 | 42.08 | 19.79 | 27.24 |
| 1970.00 | 6.40 | 51.70 | 55.61 | 41.77 | 21.59 | 30.10 |
| 1971.00 | 9.40 | 57.67 | 55.93 | 42.03 | 24.24 | 33.43 |
| 1972.00 | 7.10 | 64.62 | 55.97 | 40.84 | 26.39 | 38.23 |
| 1973.00 | 9.20 | 74.55 | 56.01 | 40.98 | 30.55 | 44.00 |
| 1974.00 | 16.00 | 84.51 | 56.06 | 46.40 | 39.21 | 45.30 |
| 1975.00 | 24.20 | 106.72 | 56.10 | 48.28 | 51.52 | 55.19 |
| 1976.00 | 16.50 | 126.27 | 56.14 | 46.30 | 58.46 | 67.81 |
| 1977.00 | 15.80 | 146.97 | 56.18 | 42.09 | 61.86 | 85.11 |
| 1978.00 | 8.30 | 169.34 | 56.23 | 42.49 | 71.95 | 97.39 |
| 1979.00 | 13.40 | 199.22 | 56.27 | 42.75 | 85.17 | 114.05 |
| 1980.00 | 18.00 | 233.18 | 56.31 | 44.54 | 103.86 | 129.32 |
| 1981.00 | 11.90 | 256.28 | 56.36 | 45.29 | 116.07 | 140.21 |
| 1982.00 | 8.60 | 281.02 | 56.47 | 45.56 | 128.03 | 152.99 |
| 1983.00 | 4.60 | 307.21 | 56.57 | 43.20 | 132.71 | 174.49 |
| 1984.00 | 5.00 | 329.91 | 56.68 | 42.59 | 140.51 | 189.40 |
| 1985.00 | 6.10 | 361.76 | 56.79 | 41.71 | 150.89 | 210.87 |
| 1986.00 | 3.40 | 389.15 | 56.90 | 40.76 | 158.62 | 230.53 |
| 1987.00 | 4.20 | 428.67 | 57.00 | 38.40 | 164.61 | 264.06 |
| 1988.00 | 4.90 | 478.51 | 57.11 | 36.28 | 173.60 | 304.91 |
| 1989.00 | 7.80 | 525.27 | 57.22 | 34.25 | 179.91 | 345.37 |
| 1990.00 | 9.50 | 570.28 | 57.33 | 35.23 | 200.91 | 369.37 |
| 1991.00 | 5.90 | 598.66 | 57.44 | 36.45 | 218.21 | 380.45 |
| 1992.00 | 3.70 | 622.08 | 57.60 | 37.97 | 236.20 | 385.88 |
| 1993.00 | 1.60 | 654.20 | 57.77 | 39.70 | 259.72 | 394.48 |
| 1994.00 | 2.40 | 692.99 | 57.94 | 38.48 | 266.66 | 426.33 |
| 1995.00 | 3.50 | 733.27 | 58.10 | 38.73 | 283.99 | 449.27 |
| 1996.00 | 2.40 | 781.73 | 58.27 | 38.93 | 304.33 | 477.40 |
| 1997.00 | 3.10 | 830.01 | 58.44 | 37.64 | 312.42 | 517.60 |
| 1998.00 | 3.40 | 879.15 | 58.61 | 36.22 | 318.43 | 560.72 |
| 1999.00 | 1.50 | 928.87 | 58.78 | 35.32 | 328.08 | 600.79 |
| 2000.00 | 3.00 | 976.28 | 58.94 | 34.63 | 338.09 | 638.20 |
| 2001.00 | 1.80 | 1021.62 | 59.11 | 35.49 | 362.57 | 659.05 |
| 2002.00 | 1.70 | 1075.37 | 59.46 | 35.80 | 384.98 | 690.39 |
| 2003.00 | 2.90 | 1139.44 | 59.80 | 36.44 | 415.21 | 724.23 |
| 2004.00 | 3.00 | 1202.37 | 60.15 | 37.55 | 451.49 | 750.88 |
| 2005.00 | 2.80 | 1254.29 | 60.49 | 38.93 | 488.30 | 765.99 |
| 2006.00 | 3.20 | 1328.60 | 60.84 | 37.83 | 502.61 | 825.99 |
| 2007.00 | 4.30 | 1405.80 | 61.19 | 38.69 | 543.90 | 861.90 |
| 2008.00 | 4.00 | 1433.87 | 61.55 | 40.17 | 575.99 | 857.88 |
| 2009.00 | -0.50 | 1393.85 | 61.90 | 44.58 | 621.38 | 772.47 |
| 2010.00 | 4.60 | 1458.45 | 62.26 | 45.31 | 660.82 | 797.63 |
| 2011.00 | 5.20 | 1509.60 | 62.65 | 45.13 | 681.28 | 828.32 |
Comments