Coffee House

Spending on health harms your wealth

14 March 2014

Much of the Budget debate next week will be devoted to the future growth rate of GDP and of total public spending; but there probably won’t be much attention paid to the impact of particular elements of public spending on growth. Yes, people (particularly well-paid consultants) talk about the merits of individual projects like HS2; but it seems to be an article of faith among politicians of all parties that some government functions result in more growth than others. In particular, many politicians unthinkingly assume that spending on infrastructure, education and healthcare necessarily improves the economic efficiency of both the public and private sectors.

But is the conventional wisdom accurate? In a new study published today by the Centre for Policy Studies, I focused on an analysis of differences in the composition, not the total amount, of public expenditure in 19 OECD countries over the period 1996 to 2011. I found no support for many of the politicians’ most cherished assumptions. For example, there is no observable relationship across all the 19 countries studied between the money devoted to public expenditure on education as a proportion of GDP and economic growth. Neither did the level of infrastructure investment in roads have a discernible impact on prosperity. In the case of spending on health and welfare, the study found that higher average levels of relative spending on these functions had a negative correlation with growth.

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This is disturbing. In 2011, spending on education, health and welfare accounted for two thirds of total public expenditure across the 19 countries analysed. If health and welfare spending have a negative impact on growth, then this suggests that the law of diminishing returns has reached a critical point. The implication? Expenditure needs to be trimmed back sharply to permit the private sector to expand. If spending on education and roads has no impact then much of it is wasted and would be better allocated to other uses.

Giving the economy room to grow does not produce trivial results. In the long-term, a rate of GDP per capita growth of 2% means that the economic standard of living doubles in 36 years. An extra point on that growth rate would double our income in just 25 years.

Brian Sturgess is the author of Not Paved with Gold: government ‘investment’ does not equal growth, published today by the Centre for Policy Studies

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  • HJ777

    Is anyone surprised that higher spending on ‘health’ has a negative impact on growth?

    Quite apart from the fact that the vast majority of the benefit from ‘health’ spending comes from relatively cheap public health measures and long established and low cost medical treatments (e.g. vaccination), people consume most of their lifetime medical care cost when they are well beyond retirement age.

    Of course, I’m not suggesting that old people shouldn’t receive care, just that we shouldn’t expect it to be economically beneficial.

  • HookesLaw

    Its perfectly possible to spend money on education for perfectly valid reasons and for other things to impact on an economy which would say stunt growth.why should there be an obvious link?
    It is surely valid as a broad principle to provide an effective education. I am sure we would all like such an education service to be provided as efficiently as possible.
    I cannot help but think that the author is setting up a straw man to justify his argument.

    • Hello

      And, of course, outcomes vary from country to country. For example, while you would expect the cost of educating, say an Italian, to be very high, the cost of educating an Englishman, for whom most knowledge is a priori anyway, should be much lower.

  • William Haworth

    Spending on infrastructure is the cost of being in business. If I buy a new photocopier I don’t make more profit; without one I would lose business because I don’t keep the records of previous sales that I need. Who can measure what might have been lost, but actually wasn’t?

  • Makroon

    Does anybody know why comments on Benn’s death have been embargoed, so that the Speccie journos, who mostly weren’t even born when Benn was wreaking his havoc, can lecture us (of a certain age), on what a “caring, avuncular, kind and non-devious national treasure” the bloke was ?

    • Hello

      Does anybody know why you’re so desperate to lecture everyone on how he wasn’t? Relax. In any case, it’s Hug a Lefty week.

      • Makroon

        I’m not desperate, I don’t really believe in ‘speaking ill of the dead’.
        I just think this one-way traffic is pathetic – what is Mr Nelson afraid of ?
        The left were given full licence to denigrate Margaret Thatcher.

    • HookesLaw

      Correct. I am sorry Benn is dead … sadly it happens to us all. But Benn was a fraud and an idiot. As you say this was exposed years ago.

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