§ Your recent written question asked for a reconciliation between the ratio of 44 ½ per cent. quoted in my speech to the IFS on 10 May, and the written answer given to you on 8 June.
§ The different figures reflect two approaches to measuring this ratio, both of which are shown in Cmnd. 8494 I, the latest Public Expenditure White Paper (Chart 1.4).
§ Strictly the absolute level of the larger ratio has limited economic significance because the numerator and denominator represent two very different concepts. The denominator—GDP—is a measure of goods and services actually produced or consumed in the economy. The numerator—public expenditure—on the other hand does not only include direct purchases of goods and services but transfer payments and loans as well. These disbursements do not provide the public sector with direct control over resources: how they are spent will depend on the recipient. The role of the public sector for these elements of expenditure is essentially to transfer and redistribute resources between private sector economic units (people and firms) rather than to absorb a share of Gross Domestic Product. Nevertheless the ratio provides a way of measuring how overall public expenditure is moving over time relative to prices and real growth in the economy at large. The definitions used are not without controversy and are discussed, for example, in Sir Leo Pliatzky's recent book 'Getting and Spending'.
§ It is useful to supplement the PE/GDP ratio however measured by the ratios you requested in your Question answered on 8 June. Adding together central and local government expenditure on goods and services (both current and capital) provides a measure of the direct expenditure of general government on the Gross Domestic Product. The third line in the table provided in the reply (NHS expenditure) is of course a sub-category of the first line, so that the ratio of direct general 355W government expenditure to GDP was 24 per cent. in calendar year 1980 (rather than the figure of 29.1 per cent. mentioned in your later Question).
§ The figure of 44½ per cent. quoted in the IFS speech is an up-date of the (partly forecast) 45 per cent. given for 1981–82 in Cmnd. 8494. It was based on very preliminary and partial indications of the 1981–82 outturn for public expenditure and GDP available in early May. A more firmly based ratio for 1981–82 will be available next month.
§ I attach a reconciliation table which uses figures for calendar year 1980. Incidentally, we were unable to give you 1981 as the latest year in your 8 June answer because the absence of full overseas trade figures (an effect of the Civil Service dispute) has prevented compilation of GDP figures for that year".
| Public Expenditure and GDP | ||
| 1980 | ||
| £ million | Percentage of GDP | |
| Gross domestic product at market prices | 224,900 | 100.0 |
| Central government final consumption plus gross domestic fixed capital formation and stocks | 31,167 | *13.9 |
| (of which NHS expenditure) | (11,749) | *(5.2) |
| Central government subsidies | 4,228 | — |
| Central government current grants | 26,204 | — |
| Central government capital transfers to private sector | 1,617 | — |
| Central government capital transfers to public corporations | 322 | — |
| Central government net lending etc. | 2,992 | — |
| Local authorities final consumption plus gross domestic fixed capital formation | 22,979 | *10.2 |
| Local authority subsidies | 984 | — |
| Local authority current grants | 1,123 | — |
| Local authority capital grants to personal sector | 175 | — |
| Local authority capital grants to public corporations | 140 | — |
| Local authority net lending to private sector | 470 | — |
| Certain public corporations' capital expenditure | 1,389 | — |
| Nationalised industries' market and overseas borrowing | -329 | — |
| Adjustment to planning total including VAT and capital consumption† | -959 | — |
| Net debt interest | 4,361 | — |
| Total public expenditure | 96,863 | 43.1 |
| * Consistent with figures provided in 8 June written answer, except that the NHS figure given then excluded capital consumption, and revised in the light of later information. | ||
| † For details of the adjustment see Table 2.4 of Financial Statistics. |