The state of Britain

Government expenditure will soon account for almost half of the UK economy. One in five of Britons now works for the state; more than one in twenty work for the National Health Service.

Only in world wars or when it owned the commanding heights of industry has the British state assumed such importance. From the National Health Service, the world’s third largest employer, to the 21 concrete mixers owned by the Ministry of Defence, the public sector reaches almost every area of people’s lives.

In his April Budget documents Alistair Darling, chancellor of the exchequer, conceded that the likely underperformance of the economy was so great that public spending would soon account for 48 per cent of national income, borrowing would hit £175bn and public sector debt was close to reaching £1,000bn.

Politicians are vying to fight the next election on the size and boundaries of the state. While Gordon Brown, the prime minister, insists spending will rise, he is talking about cash spending without adjusting for expected inflation. Once the adjustments are made, public spending is set to fall from 2011. It promises to be the most savage period of public expenditure restraint since that of the mid-1990s, and to continue for longer.

So consensus reigns on the need to shrink the state, but there is no detail on what should be cut and which services protected, reflecting a lack of understanding of what the modern British state does. One of the main problems is that it has changed a great deal over the past 20 years, and this will limit the room for manoeuvre of a future government.

Health, education and social security now dominate public spending, accounting for almost £2 in every £3 spent. This proportion has risen from a little over a half as defence has been cut back and debt interest has fallen alongside lower global interest rates.

But the good times are over and in the next decade politicians will not only have to talk about tough choices, they will also have to make tough decisions. Unless Britain transforms itself overnight and becomes willing to raise taxes to Scandinavian levels – which is highly unlikely – public spending will have to be scaled back in ways that go much further than traditional Treasury-style salami-slicing.

The maths are daunting. Debt interest is no longer falling, but rising sharply as public borrowing explodes. Defence is no longer easy to cut, nor are the demands on the armed services falling as they were in the 1990s. There is no political appetite to cut the NHS. Baby boomers are beginning to retire, limiting the scope for savings from social security. And politicians talk of education as the future for the economy.

The state is so large, and the pressures are so great, that doing everything is no longer possible. Something will have to give...