Public expenditure has represented in excess of 40% of total GDP since 2004, peaking at 47% in 2010. Since then, the coalition government has embarked on a policy designed to reduce the public deficit, with major reductions in public expenditure implemented across a range of departments and sectors. Under the coalition government, public expenditure as a percentage of GDP has dropped to 40.7%, while this is forecast to further drop to 36.3% by 2019/20 under the new Conservative government:

Figure 1: Public expenditure as a % of GDP, 2005-15 actual and 2016-20 planned

(%)

Note: Year end is March

Source: MBD analysis of HM Treasury data

The new Conservative government announced that a further £37 billion of consolidation measures will be necessary to achieve a budget surplus in 2019/20. In the summer budget 2015, the chancellor outlined around £17 billion of measures that will reduce the deficit, including £12 billion by 2019/20 from welfare reform and £5 billion by 2019/20 from tackling tax avoidance and tax planning, evasion and compliance, and imbalances in the tax system. Following the spending review, the government will announce details of a further £20 billion in savings, which are to be mainly shaved off departmental budgets. The spending review is due to be concluded in autumn 2015.

Despite significant government efforts to reduce the public deficit and instigate reductions in public expenditure as a critical feature of that policy, macro economic, social, demographic and environmental pressures continue to force expenditure upwards at a nominal level.

Figure 2: Total public sector managed expenditure, 2015-20

(£ billion)

Note: Year end is March

Source: MBD analysis of HM Treasury data

In 2014, social protection (help given to those in need or at risk of hardship) accounted for 35% of total public sector managed expenditure, down from 37% in the previous year. Expenditure on social protection has increased in each year under review, culminating in a 13% rise between 2010 and 2014. The overall increase in social protection spending is largely due to the rise in state pension payments, which rose by 25% between 2010 and 2014.

The second most important area of public expenditure is the health sector, where spending increased by 4% in 2014 and accounted for 18% of total public expenditure. This share has increased moderately from 17% in 2010 as health was one of the few areas ringfenced from spending cuts.

Education was the third most important sector for public expenditure in 2014 at £90.2 billion, equivalent to 12.6% of the total. The role of educational expenditure has fallen slightly over the review period, having accounted for 13.1% of the total in 2010.

Figure 3: Segmentation of public sector expenditure, by function, 2014

(% by value)

Click here to zoom

Source: MBD analysis of HM Treasury data

A vast, and increasing, proportion of total public expenditure is accounted for by current expenditure. This was responsible for 93% of total public expenditure in 2014, up from 90% in 2010, as it has proved easier for the government to restrict capital spending in austerity measures.

Figure 4: Development of capital expenditure by the public sector, 2009-13

(£ billion)

Source: MBD analysis of HM Treasury data

Capital expenditure is dominated by four major areas: economic affairs (which includes transport), where capital spending has been reduced by 30% between 2010 and 2014; housing, where the overall reduction has been 34%; education, where capital outlay has dropped by 31%; and defence, where there has been a 20% reduction.

From healthcare and education to welfare and policing, good public services are essential to the economic and social well-being of the UK.

The UK continues to face significant financial constraints, which will remain a feature over the next five years. In 2010, the coalition government inherited the largest deficit since the second world war and 25% of government spending was borrowed. According to the latest government data, the deficit in the financial year ending 31 March 2015 has fallen by more than a third since its peak in the financial year ending 2010.

The new Conservative government has loosened the impending squeeze on public services, and announced in the July 2015 budget that the expected return to a budget surplus will be delayed by a year to 2019/20. The government is then aiming for a slightly bigger surplus than previously assumed in the medium term. This is financed by welfare cuts, net tax increases and three years of higher borrowing as the chancellor has decided to spread the pain over a longer period. For example, the government’s welfare reforms will now be phased in over three years, not two as previously announced.

A major contribution to a reduction in public spending can be derived from the efficient running of services. Public services operate in a different fashion to private sector business and have to take into account broader policy objectives, such as the need to provide fair and free access. Opening up services to new approaches from other providers, both private and voluntary, has played an increasingly important role in challenging existing ways of operating and encouraged providers to invest in new ways to operate key services.

The role of the private sector in providing public sector services has increased under the coalition government. Data by the National Outsourcing Association shows that spending on public sector outsourcing almost doubled to £120 billion under the coalition.

Although outsourcing already gathered pace in the late 1990s under the previous Labour government, it has accelerated even further since 2010 when prime minister David Cameron declared his ambition to “release the grip of state control” on public services and open them to the private and voluntary sectors.

The coalition government has introduced a number of measures to pave the way for outsourcing. In 2010, a contractual requirement for private companies taking over public sector staff to hire new employees on the same terms was scrapped. In October 2013, the coalition also made it easier for public sector employees to retain access to their state pension when they transfer to the private sector. In the coalition government’s last budget in March 2015, the chancellor removed VAT charges for private contractors bidding for government work.

Justice, defence and welfare remain the biggest markets for outsourcing. The slowest sector to develop has been health, though the number of contracts has accelerated since the Health and Social Care Act came into force in 2012.

Outsourcing is set to further rise during the current parliament as the government continues to seek cost savings. The advantages of private sector businesses running public services are often perceived to include improved staff productivity, bringing in new investment and technology, and making the services more efficient and cheaper to run.

There is effectively no public sector supply industry as no company offers the entire range of services and products used by the public sector. However, many companies have significant interests in the public sector, though they would normally be defined by a separate industry definition for both public and private sector supply, such as facilities management, waste management and aerospace. However, with the drive to efficiency across the public sector intensifying to gain maximum levels of service from increasingly challenging resources, significant inroads into public sector provision have been made by both private companies and voluntary organisations.

Long-term pressure on public spending has come from a range of sources, including an ageing population, chronic diseases, higher expectations of public services, changing family and social structures, climate change and the pressure to stay competitive globally with the rise of new economic powers. Consequently, the efficiency of service supply is critical, affording increasing opportunities to the private sector, a trend already well established in the market.

The amount of government money spent on outsourced public services has doubled under the coalition, and is set to further rise over the next five years as the government continues to look for cost savings. Justice, defence and welfare remain the biggest markets for outsourcing. An increasing number of contracts are also available in the health sector, largely as a result of the 2012 Health and Social Care Act, which has extended competition in the NHS.