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Ian Brinkley
Economic Advisor
Ian Brinkley

New OECD data reveals public social spending levels remain high in 2014

Authors: Ian Brinkley

24 November 2014

The most recent OECD estimates of public social spending in 2014 – defined as cash benefits to pensioners and the working age population and expenditure on the health and social services – accounted for about 21.7 of UK GDP, just above the OECD average of 21.6 per cent. Moreover, the OECD estimate that public social spending has since 2007 risen by much less in the UK than across the rest of the industrialised world – up 1.6 percentage points in the UK compared with 2.7 percentage points across the OECD. These figures do not suggest that the UK is devoting an excessive share of GDP to social expenditure or that the increases forced by the recession have been over-generous.

The Coalition’s focus has been on cutting back on social welfare spending through cash benefits while protecting spending on health and other social services. The OECD figures for 2012 show that the UK spent less than the OECD average on cash benefits and more than the OECD average on health and social services. A further break-down of spending on cash benefits showed that the UK spends less on pensions but more on benefits for the working age population than the OECD average.

This distribution is not too surprising given the UK’s historic reliance on private pension provision, the large numbers of low pay jobs in the economy, and the emphasis over the past decade on improving in-work benefits in order to increase work incentives. However, what the OECD tables show is that the UK’s spending on cash benefits is strongly focused on poorer households. In the UK about 26 per cent of social spending goes on the bottom fifth households, and only 8 per cent to the top fifth. Across the OECD the distribution is much more even, with better off households just as likely to benefit from social spending as poorer households. In 2012 both the bottom and top fifths across the OECD received about 20 per cent of the total.

This is a bit of a doubled edged sword. Social spending in the UK is well-targeted, but that also means that many better-off households may conclude they get little direct benefit from cash social spending and hence be more reluctant to sustain current levels of spending on welfare. It also means that there is limited room to make the system even more targeted by reducing benefits for better off households – the share going to the richest two fifths of households is already one of the lowest in the OECD. Finally, it makes it hard for a future government to implement large scale additional cuts in social benefits without hitting poorer households disproportionately.

A future government’s job in tackling the deficit would be somewhat easier if it was supported by changes in the labour market that increased tax revenues and reduced pressure on social welfare budgets. So far the Exchequer has not benefitted as much as might have been expected from the recovery given high levels of employment and falling unemployment. Changes that would help include stronger wage growth through a recovery in productivity; a fall in the share of low pay jobs and an increase in better paid jobs would reduce both the demand for in work-benefits and increase the tax take; a shift towards employee employment and away from self-employment, as on average employees seem to earn more; and strengthening efforts to help firms tackle problems that arise in the workplace from physical and mental illnesses would help more people stay in employment for longer and speed up the return to work. An increase in migration from the EU could also help, as migrants on average are younger and more skilled than natives and contribute more in taxes than they take out in benefits.

Not all of these changes are within the power of government to directly influence, and some may be too difficult politically. But three areas a future government should focus on to help boost tax revenues and reduce some welfare expenditures over the medium term are improving workplace productivity, implementing a strategy to reduce the incidence of low pay from among the highest in the OECD, and strengthening policies that support workplace health and well-being.