Where the money goes

Public spending

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In 1908, Government spending was equivalent to just one seventh of economic output (GDP), with more spent on defence than on health, welfare and education combined.

Today, public spending equates to half of GDP, with eight times more spent on health, old-age pensions and welfare than on defence.

The two World Wars had an enormous effect on public spending, which increased dramatically not only during wartime, but remained permanently higher thereafter. This was partly due to high debt interest payments on wartime borrowing, but in the long term may also have been because the experience led to increased acceptance of higher levels of public spending and associated levels of taxation.

Besides the increase in the scale of public spending over the century, its composition has altered. Even in the early 1950s, defence spending accounted for 9% of GDP and over a fifth of all public spending. This was more than social security and health spending combined. Defence spending fell rapidly in the post-war period, even before the end of the Cold War: by the late 1980s, it accounted for around 4% of GDP and is now less than 3%.

As the government’s financial commitment to military protection waned, so its role as a provider of social protection expanded. The process arguably began with the Old Age Pensions Act 1908 (providing a means-tested pension of £20 per week in today’s money to those over 70) and culminated with the implementation of the 1942 Beveridge Report, which famously recommended that the state accept responsibility for the social security of its citizens from ‘cradle to grave’.

Since the early 1950s, this responsibility has been reflected in growing education, health and social security budgets: together, these have increased from 11% of GDP to nearly 30%.

Adjusting for inflation, health spending is now 17 times higher than in 1948, and welfare and pensions spending 12 times greater. In the future, an ageing population, together with medical advances and richer conceptions of what constitutes an adequate standard of living, will put ever-greater pressure on health, pension and social care budgets. Economically, the generosity of social protection may be reaching its sustainable limits. But expectations, once raised, may prove politically difficult to disappoint.

Government has become more active in redistributing resources over the past century
The chart shows public spending as a share of economic output.

 The chart shows public spending as a share of economic output

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