For background, read this comparison of the performance of the UK and Sweden, and the comment thread; then the following response by Scott.
First, I tackle UK monetary policy:
As illustrated by the currency discussion, the figures in this debate is strongly influenced by the choice of starting point.
For example, nominal GDP in the UK has been growing at an annual rate of 6% for the last nine months.
All of the problems in Scott's figures come from a single quarter, Q1 2009. In Q1 of 2009 we were still in recession, with a 3% fall in NGDP in that quarter alone. I believe the CPI was also negative in that quarter (though I can't find quarterly index figures for that, only annual changes).
It was only in March 2009 that the Bank of England's QE programme was announced (it was increased in May and again later in the year). The Bank clearly recognises the issues in this quote from its May inflation report:
As discussed in Section 2, UK nominal demand growth has fallen to well below its average annual rate of around 5% since the MPC's inception, a period over which inflation has been, on average, close to target. Growth in broad money, as measured by M4, has picked up since mid-2008. But as described in the box on page 13, that pickup wholly reflected strong growth in money holdings of institutions which intermediate between banks. Growth in a more economically relevant measure of broad money, which excludes such institutions, has slowed broadly in line with nominal spending (Chart 1.2).
Do read the whole report if you have time, it gives some good insight into the Bank’s beliefs about NGDP and money.
In other words, the severity of the recession became clear in Q4 2008, and the Bank cut nominal interest rates sharply. Q1 2009 was even worse; so the Bank cut interest rates to zero, and realised that a new policy (QE) was required. It immediately instituted that policy, and the effect of the policy was to create an annual NGDP growth rate of 6%.
Does this not sound like a bank doing roughly the right things? Maybe they could have acted a bit faster, but did any mechanism exist in 2008 by which they could measure NGDP expectations?
If you want some annual figures, wait for the Q2-Q2 figures instead of Q1-Q1: they will be far better. In fact, I expect Q2 figures to be a good bit better than those of recent quarters, meaning that NGDP growth will probably be a good bit higher than 6%.
Will the Bank allow NGDP to catch up to previous trend? That is a good question and we'd love to know the answer. The quality of Mervyn King's public communication falls far short of the effectiveness of the Bank's policy actions. But the Bank is not as delinquent as the Q1 2009 figures would suggest.
Back in a moment and will talk about UK public sector spending.
Then, public spending in the UK:
OK, British government spending.
The first thing is to get the figures right. Where does this 52% come from? An OECD estimate - and the OECD, to say the least, has an unpredictable approach to economic data. The three other sources that I can find put the figure close to 45% (£645bn spend, £1410bn GDP):
The percentage fell from about 40% to 38% in the late 1990s and then rose to about 41% during the 2000s - only reaching 43% in 2008-09 and (a projected) 45-48% in 2009-10.
A large part of the rise in the last two years is due to falling nominal GDP (which as Scott points out fell 5% during the 2008-09 fiscal year - in the UK that runs from April to March). Real public spending has grown quite slowly in this period, with most of the rise coming from increased social transfers. Indeed, some of the differences in the above figures may come from the choice of denominator: is it annualised GDP at the start of the year, the end of the year or total GDP during the period in question? And do the figures reflect data revisions after the end of the period?
Anyway, the point is that UK public spending is not much higher than Canada's. Incidentally I'm not sure if I have a reliable figure for Sweden - this source says 52% and this unsourced figure is 53%. Maybe that's why they have been doing better than the UK!
About a third of UK public spending is transfers, so government consumption - a more meaningful concept - is around 30% of GDP. 8% of GDP goes on health, 6% on education, 3% on defence, 2% on police and justice, and the rest on a range of other stuff - there is an interesting breakdown here.
None of this is to claim that the UK does not have problems.
The effectiveness of lots of that public spending is lower than it should be. While the outgoing government had good intentions and (in my opinion) largely chose to spend money in the right areas, policy was too volatile for effective spending and management norms to develop. A bit of stability would allow civil servants, who are mostly pretty good at their jobs, to find mechanisms that work for delivering services efficiently.
Outside of the public sector, a large proportion of the population has low formal education, although I think there are informal skills which partly compensate for this. We did have a low savings rate (private and public) for years, though in the last two years private saving has soared - largely financing the public deficit of course. The economy has been overweighted towards the property sector - though there is some justification for this in a high population density country.
And government finances are strongly dependent on the degree of income inequality - in other words, on the finance sector. The collapse in finance sector profits and shrinkage of high wages since 2008 has resulted in a £50-80 billion fall in tax revenue, which will probably now have to be fixed by increasing taxes on the rest of the economy.
On Scott's final point - yes, I suppose philosophically the UK's poor or unskilled people don't deserve to benefit from public goods financed by the City of London; but unlike low-income African or Asian people, they are the ones who have a vote. Economically one can argue that the financing of public goods and social insurance is efficiently done within a relatively closed, coherent society. But I would certainly much rather see higher transfers - or even better, productive investment - to other parts of the world. This, however, is just a dream right now.
Frankly, like most countries, the UK is a complex mix of strengths and weaknesses, and the simplistic adjustment of government spending numbers up or down is not going to make a lot of difference. Probably the one thing the government can best do is take Scott's advice and manage NGDP growth. Whatever happens, we will gradually feel our way towards a more productive, wealthier and better society, along with the rest of the world.Update: See the further chain of comments between Scott and me for more on this. I'm not sure if we have shed any more light on the issues.