UK public expenditure Patterns of change1948-2002

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 pounds @2000 )

Atl Chu Mac Wilson Heath Callaghan Thatcher Major Blair

4800

10000

20000

30000

40000

50500

1948 51 55 59 64 66 70 74 79 84 87 91 97 2002

Quadratic trend line

millions of pounds adjusted to 2000 value

R squared = 0.95 (linear) 0.96 (quadratic)

Education total: (a) adjusted for inflation 1948-2002

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)

Atl Chu Mac Wilson Heath Callaghan Thatcher Major Blair

5000

50000

100000

200000

300000

1948 51 55 59 64 66 70 74 79 84 87 91 97 2002

Quadratic trend line

millions of pounds adjusted to 2000 value

R squared = 0.97 (linear) 0.99 (quadratic)

Totalled person-related programmes: (a) adjusted for inflation 1948-2002

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

0

50000

100000

150000

200000

1948 51 55 59 64 66 70 74 79 84 87 91 97 2002y00

Linear fit Rsq = .92

Quadratic RSq = .99

Social Security Residuals (from quadratic)

-10.0

0.0

10.0

20.0

1948 51 55 59 62 66 70 74 79 84 87 91 97 2002

(c) residuals from de-trended series (£ billions)

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

-1.0

0-0

.50

0.0

00.5

01.0

0

0 5 10 15 20Lag

Bartlett's formula for MA(q) 95% confidence bands

ACF of Education raw data

-1.0

0-0

.50

0.0

00.5

01.0

0

0 5 10 15 20Lag

Bartlett's formula for MA(q) 95% confidence bands

AC of Residuals from linear

-0.5

00.0

00.5

0

0 5 10 15 20Lag

Bartlett's formula for MA(q) 95% confidence bands

AC of differenced

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 correlationseg, defence & education

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

Lag Number

-1.0

-0.5

0.0

0.5

1.0

CC

F

Coefficient

Upper Confidence Limit

Lower Confidence Limit

dtdef with dtedu

Correlations between series

• Defence Health -@5 Environment -@3 Trade -@0 Housing -@5

• Law Health +@7 Roads +@0 -@5 Trade +@1 Social +@1

• Education Housing +@0 Social +@0• Health Environment +@0 Housing +@0• Env’ment Law -@5 Roads -@5 Trade +@1 Housing -@6

Social +@1/4 -@6• Roads Defence -@3 Health +@6 Trade +@1• Trade Law -@7 Education +@5/7 Health +@5/7

Roads -@5 Housing +@5 Social +@0 -@6/7• SocialLaw -@5 Health +@7 Roads -@5

Correlation needs investigationEducation & Health ( no lag )

4849

50

99

9897

00

01

02

78

7776

75

70

79

646566

67

6968

74

55

5453

52

51

71

72

73

59585657

6263

6160

9293

9496 9588

87

8689

85

90

91

84

82 83

8180

-2

0

2

4

6

8

Edu

catio

n fo

r sa

me

yea

r

-4 -2 0 2 4 6Health

Detrended residuals in £billion

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

50

010099

02

98

97

76

78

75

77

7079 65

64666768

69

74

52515554

53

7271

73

5657

586260636159

95

94

93

96

92

89

88

8485

87

81

82

83

8680

90

91

-10

0

10

20

Soc

ial S

ecu

rity

for

mar

ked

yea

r

-10 -5 0 5 10 15Trade lagged 2

Detrended residuals in £billion

Health enabled by Defence

50

49

00

97

99 98

02

01

76

78

75

77

70

79

6765646669

68

74

51

52

55 5453

7172

73

606162

59

63

58 5657

9695

94 93

9280

82

81

83

84

899091

85

888687-4

-2

0

2

4

6

Hea

lth f

or m

arke

d y

ear

-4 -2 0 2 4 6Defence lagged 1

Detrended residuals in £billion

Housing enabled by Defence

01

02

00 99 9897

7576

77 78

70

79

64

65

66

676968

74

54

53

55

71

73

72

6362

56

6061 5958

57

93

949592

96

83

80

82

84 8186

85

87

88

8990

91

-5

0

5

10

Hou

sin

g fo

r m

ark

ed

yea

r

-4 -2 0 2 4 6Defence lagged 5

Detrended residuals in £billion

Health - accelerating growth

Atl Chu Mac Wilson Heath Callaghan Thatcher Major Blair

5413

68371

1948 51 55 59 64 66 70 74 79 84 87 91 97 2002

Quadratic trend line

millions of pounds adjusted to 2000 value

R squared = 0.93 (linear) 0.98 (quadratic)

Health total: (a) adjusted for inflation 1948-2002

Health as percentage of GDP

IMF

2

3

4

5

6

7

He

alth

as

per

cen

t of G

DP

1948 51 55 59 64 66 70 74 79 84 87 91 97 2002y00

Rise and fall of Housing (TBA)

0

5

10

15

20

60 70 80 90 100

Housing totalas percentage of GDP

Mac Wilson Heath Callaghan Thatcher Major Blair

0

1

2

3

4

1962 66 70 74 79 84 87 91 97 2001

Housing transfers & capitalas percentage of GDP

Mac Wilson Heath Callaghan Thatcher Major Blair

0

1

1

2

2

1962 66 70 74 79 84 87 91 97 2001

Housing transfers

Capital

Environment current & capitalas percentage of GDP

Mac Wilson Heath Callaghan Thatcher Major Blair

0.00.04

0.4

1.29

1962 66 70 74 79 84 87 91 97 2001

Current

Capital

Trade transfers & currentas percentage of GDP

Mac Wilson Heath Callaghan Thatcher Major Blair

0.0

0.2

0.5

0.7

1.1

1.6

1962 66 70 74 79 84 87 91 97 2001

Current

Transfers

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

Personal Capital

Security

0

0

20

20

40

40

60

80

100

48

49 50

51

52 53 54 55

56 57

58 59 60 61 62

63 64 65 66

67

68 69 70 71

72 73

74 75

76

77 78 79 80 81 82 83 84 85 86 87

88 89

90

91

92 93 94 95 96

97 98 99 00 01

02

Capital

Subsidies

Current

Education

.04

.04

.16

.16

.72

.9

62

70

73

75

79 85

92

97

00 01

What can we see in Education?

1962-73 Capital up Subsidy up Current down

1974-79 Capital fast down Subsidy up Current up

1979-92 Capital down Current up 1992-97 Capital up Current 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