The British Experiment in Self-Government Continues

Follow the Money: How Much Does Britain Cost?, Paul Johnson, Abacus Books, 320 pp., $34.99, February 2023

Seven years after the referendum on whether the United Kingdom should remain a member of the European Union, the sunlit uplands promised by Brexiteers are nowhere in sight. Nearly 60 percent of voters believe Brexit has gone badly. That’s not surprising, given how much the economy has flatlined—not helped by the brief Liz Truss premiership and the accompanying catastrophe of a budget.

In a helpfully concise new book, Paul Johnson, the director of the Institute for Fiscal Studies, provides his assessment of how things are going by walking the reader through the British public-sector budget. As his title, Follow the Money, suggests, that’s where the actual painful questions are. Johnson’s exercise focuses attention on the big-budget items: the most important taxes and the most important spending programs. In the U.K., that means the income tax, the National Insurance payroll tax, and the value-added tax on the revenue side, and health care, pensions, and benefits on the spending side.

That’s a good practice for citizens on any side of the Atlantic. Voters famously overestimate how much money goes to foreign aid, for instance, and forcing them to stare at a few pie charts every once in a while would not be bad medicine at all. (The Kindle version of the book, the one currently available in the United States, unfortunately does not actually include any pie charts. Hopefully the hardcover version, coming out this fall, does.)

There is a tremendous amount to like and appreciate in this book. It is a surprisingly light and enjoyable read for what is ultimately a detailed discussion of national budgeting choices and options. It really does cover the main elements of the budget. It is realistic about trade-offs and reform options. And it leans into the author’s expertise as a former chief economist at the U.K.’s Department of Education. Frustration shines through the two chapters that cover schooling in particular, which detail the travails of the 14 education secretaries that were in office between 2000 and the writing of the book (there have been three more since), running a department that changed names three times.

What is perhaps most striking throughout the book is how similar the challenges of the United Kingdom are to those faced by the governments of different advanced economies, even if the British have less room to maneuver than others.

Take flailing education policy as an example: Spanish K-12 education is currently being reorganized on the basis of the Ley Orgánica por la que se modifica la LOE de 2006 (LOMLOE), which replaced the 2013 LOMCE, which had introduced significant changes to the 2006 LOE, which had replaced the 1990 LOGSE, successor to the 1985 LODE, which had replaced the 1980 LOECE. The opposition People’s Party has, naturally, promised to do away with the LOMLOE when it returns to power, something that may happen later this year. And in the U.K., as in the U.S. and the Netherlands, attempts to substitute student loans for direct subsidies have neither protected the treasury nor ensured a broadly equitable financing of the higher education system.

On the spending side more broadly, government budgets in OECD countries are increasingly dominated by old-age pensions, health care, and other programs often classified as “social insurance.” Some of this is the price of success: Increased life expectancy has led to increased spending on health care, social care, and pensions alike. The largest of these spending categories, and the fastest-growing, is typically health care. In the U.K., spending on health care alone accounts for a fifth of government expenditures. This is not an exceptionally high number: It is about a sixth in France, a bit over a fifth in Germany, and about a third in the U.S. In fact, the U.K. spends less on health care overall than one might expect based on its levels of income. It is extremely unlikely that this spending will decrease over time, even as a share of GDP, as long as medical advances continue and the sector remains relatively labor-intensive.

It is particularly unlikely because the U.K. has already implemented most of the obvious cost control measures that the U.S. is barely considering. These include cost-benefit analyses to assess the value of medical treatment, rationing, and ceremonial worship of the National Health Service (NHS). Millions of people are currently on NHS waiting lists, and reliance on private alternatives to the NHS has grown in recent years—not a situation where significant savings are likely to materialize.

Spending on pensions—including on pensions for public-sector employees—is another major component of this spending category. I will not spoil the bizarre turn U.K. public-sector pension reform took in December 2018, but it highlights the difficulties associated with reforming programs that are so central to people’s financial well-being and that require thinking decades ahead.

Something had to give in response to this growth of the welfare state, and in the U.K., that something has turned out to be everything. Tax revenue is at 37 percent of GDP, a historic high not seen since the 1940s. In the aftermath of the COVID-19 crisis, government debt has escalated to over 100 percent of GDP for the first time in half a century, leaving only the NHS as a larger spending item than interest on the debt. As in most other European countries, defense spending has fallen so far it doesn’t even merit its own chapter in this book. Meanwhile, local governments saw their budgets cut and spending per capita fall by a quarter in the 2010s.

Yet a major downside of Johnson’s approach to the workings of the public sector is that it ignores areas of policymaking that are dominated by regulatory action instead of tax-and-spend policies. That includes areas of major importance such as immigration and land-use policy.

The barriers to international mobility created by governments are of first-order importance for growth and human flourishing in a world where moving is cheaper than ever and product markets are heavily integrated. They are, of course, of the utmost indirect importance as well, as opposition to immigration has been a major political force in recent years—in few places more so than in the U.K., where resistance to freedom of movement drove much of the enthusiasm for exiting the European Union.

Land-use policy, dull as it may sound, is perhaps even more crucial to understanding the economic problems and political challenges not just of the United Kingdom, but of the U.S. and continental Europe as well—and an area missing from the book. As has happened elsewhere, home prices in the most in-demand parts of the United Kingdom—London, in particular—have escalated in recent decades. This undermines regional convergence by making it difficult for workers to arbitrage away gaps in economic opportunity.

In the United States, it used to be the case that lower-income states enjoyed faster income growth than higher-income states, as workers flowed from the former to the latter. That process—“leveling up,” as the Conservative government dubbed it—ground to a halt entirely as restricted supply caused housing costs to escalate in high-income areas. This locked out lower-income workers, who spend larger shares of their budget on housing. While it used to be the case that moving to dense areas made workers significantly better off, non-college workers now face an urban wage penalty once housing costs are accounted for.

In the resulting equilibrium, superstar cities like London have increasingly become the exclusive domain of the wealthy, while peripheral areas struggle to respond to negative shocks. Follow the Money does not tell this story at all. Instead, Johnson focuses on drivers of dysfunction in housing markets and of regional disparities that, while egregious, seem of secondary importance. The U.K. levies a deranged transaction tax on home sales, for example, of 12 percent (!) on properties over 1.5 million pounds. It also levies property taxes based on assessed values from 1991—the British version of California’s Proposition 13—effectively taxing residents of regions that have struggled at higher rates than those of places that have flourished. These policies are bad, unfair, and another barrier to mobility—but mostly salient due to their budgetary impact.

But enough carping. This is a fine, highly readable book, and Johnson is upfront and realistic about all the U.K.’s problems. As he writes in his conclusion: “We enter the middle years of the 2020s in worse economic straits than at any time I can recall.” That is not just a statement about the difficult budgetary choices facing the country, but also about the inevitable consequences of the geopolitical context, the energy transition, inflationary pressures, aging, and the U.K.’s persistently lackluster productivity growth.

These problems have been exacerbated by self-inflicted policy mistakes—most prominently Brexit, of course—and the unfortunate clown parade of David Cameron, George Osborne, Nigel Farage, Boris Johnson, Jeremy Corbyn, Liz Truss, Kwasi Kwarteng, and Nicola Sturgeon. Who knows what else the British have in store for us next. One can only hope that the potential Starmer government decides to implement some of the sound recommendations in this helpful book—it would be about as much as one can hope for. But will it suffice?