Where £1,363bn goes; current, capital and transfer spending; why the share of GDP has risen; effects on growth, living standards, equality and taxation; crowding out and crowding in on the loanable funds diagram.
UK public spending in 2025/26 was £1,363bn, £72bn more than the year before and about 45% of GDP. Nearly half went on two things: social protection, which includes the state pension, universal credit and disability benefits, at £407bn, and health at £258bn. Debt interest, at £130bn, cost more than education and training at £126bn. The remaining £442bn covered defence, transport, policing, local services, the environment and everything else the state does.
Spending as a share of GDP was 35% in 1999–2000. It rose through the 2000s, jumped in 2008–09 and again in 2020, and the OBR expects it to stay between 44% and 46% for a decade, the longest sustained period of spending at that level since the Second World War, driven by an ageing population, health and debt interest.
What does public spending do to the economy, and what does it cost in private activity forgone?
Source: HM Treasury spending by function 2025/26 (as published in GERS 2025–26, Table 3.6); ONS public sector finances; OBR Economic and Fiscal Outlook, November 2025.
Public expenditure is spending by central and local government and public corporations. Current spending is on day-to-day running: wages, drugs, fuel. Capital spending is investment in assets that last: roads, hospitals, schools, defence equipment. Transfer payments move income from taxpayers to recipients, pensions and benefits, without the state buying any good or service; they are not part of government spending in the GDP identity, though they are the largest item in the budget.
Spending as a share of GDP rises with national income (richer societies want more health and education, Wagner’s law), with an ageing population (pensions and care), with crises (2008, 2020) and with the cost of servicing debt. Its effects: on productivity and growth, through infrastructure, education and research, if it is well chosen; on living standards, through services and transfers; on equality, since transfers and free services are worth most to the poorest; on the level of taxation needed to pay for it, with the disincentives that brings; and on crowding out, if government borrowing raises interest rates and takes resources private firms would have used.
Crowding out is shown in the market for loanable funds: government borrowing adds to the demand for funds, the interest rate rises, and some private investment that would have happened at the old rate does not. Crowding in is the opposite: in a recession, with idle resources and savings nobody wants to borrow, public spending raises demand and private investment follows.
In 2025/26 the UK government spent £130bn on interest on its debt and £126bn on education.
Total public spending was £1,363bn, about 45% of GDP. Social protection, pensions and benefits, took £407bn; health £258bn.
Why has debt interest overtaken education?
Debt interest is the price of past deficits. At 2% Bank Rate and a smaller debt it was under £50bn; with debt near 95% of GDP, a quarter of it index-linked to inflation, and Bank Rate at 4%, it is £130bn. Every pound of it is a pound not spent on something else: the opportunity cost of public expenditure, inside public expenditure.
The shape of the state. Social protection and health are half of all spending, and both grow with age: more pensioners, more care, more expensive treatments. Debt interest at £130bn now exceeds education; it buys nothing and reflects past borrowing and today’s interest rates. Most of the first bar is transfer payments; most of the second is current spending on staff; capital spending is a small slice spread across all five.
Check: Which of these is a transfer payment?
Transfers move income without the government buying anything. Wages are current spending, motorways capital spending; debt interest is a separate category of current spending.
Why it rises. Ageing: the share of the population over 65 climbs every year, and pensions are uprated by the triple lock. Health absorbs new technology and higher wages. Crises ratchet spending up and it rarely falls all the way back. Interest rises with debt and rates. The result: spending stuck near 45% of GDP, financed by a tax burden heading for a post-war record and by borrowing of £132bn.
Check: Social protection cost £407bn out of total spending of £1,363bn. Its share was about:
407 ÷ 1,363 = 29.9%. Health was 19%, debt interest and education about 9% each.
Crowding out. Savers supply funds; firms and the government borrow them. Government borrowing of £100bn shifts demand to **D2**. The interest rate rises to 5% and total borrowing to £200bn, but at 5% private firms borrow only £100bn, down from £150bn. £50bn of private investment is crowded out; the other £50bn comes from extra saving drawn out by the higher rate.
Teacher tip: The size of the crowding out depends on the slope of the supply of funds. In a recession with abundant savings the supply curve is nearly flat and crowding out is small; near full employment it is steep and large. That is the whole Keynesian-versus-classical argument on one diagram.
Check: The government borrows an extra £100bn a year, shifting the demand for loanable funds from D1 to D2. At the new equilibrium:
Total funds rise from £150bn to £200bn, but the government takes £100bn of them. Private borrowers face 5% and demand only £100bn.
What spending does for growth. Capital spending on transport, energy and research raises productivity and shifts LRAS; education and health build human capital; transfers reduce poverty and inequality but do not add to capacity. The test is the return on each pound against the return the private sector would have earned with it. Well-chosen investment crowds in; poorly chosen spending crowds out and leaves the debt.
Check: Crowding in is most likely when:
With a flat supply of funds and spare capacity, government spending raises output and expected profits without pushing up interest rates.
The judgement. Spending near 45% of GDP buys a health service, pensions that have cut pensioner poverty, and schools; it is also financed by the highest tax burden on record and £130bn of interest. The questions an exam wants: what the money is spent on, how it is financed, how much spare capacity there is, and what return it earns against the private alternative. The level alone settles nothing.
Check: Which is the strongest argument that high public spending can lower living standards in the long run?
The case against is about financing and the quality of spending, not the existence of public services.
E2 is total borrowing, government plus private. Private demand is still D1, and at 5% firms borrow £100bn, not £200bn. Private investment falls by £50bn; it does not rise.
Evaluate the view that a high level of public expenditure is damaging to economic growth.
Public expenditure is spending by central and local government: current spending on running services, capital spending on long-lived assets, and transfer payments such as pensions and benefits. In 2025/26 the UK spent £1,363bn, about 45% of GDP, of which social protection was £407bn, health £258bn, debt interest £130bn and education £126bn.
The case that a high level damages growth rests on how it is financed and what it displaces. Spending must be paid for by taxes, which reduce incentives to work, save and invest as the tax burden heads for a post-war record, or by borrowing. Borrowing adds to the demand for loanable funds, raising the interest rate and crowding out private investment that would have happened at the lower rate: on the diagram, government borrowing of £100bn raises the rate from 4% to 5% and cuts private borrowing from £150bn to £100bn. Past borrowing also leaves a legacy: £130bn of interest buys no service and now exceeds the education budget. If the public sector uses resources less productively than the private sector would, the economy’s growth rate falls.
**However,** the effect depends on composition and circumstances. Capital spending on transport, energy and research raises productivity and shifts long-run aggregate supply; spending on education and health builds the human capital on which growth rests. In a recession, when savings are abundant and private firms will not invest, government spending raises demand without raising interest rates and can crowd private investment in rather than out. Transfers and services also sustain consumption and reduce the inequality that itself weakens growth. International comparison shows no simple rule: France spends around 57% of GDP and Switzerland far less, and both are prosperous.
On balance the level of public expenditure is a poor predictor of growth; what matters is what it buys, how it is financed and how much spare capacity exists. The UK’s weakness has been composition, with capital budgets repeatedly cut to protect current spending and an interest bill that now crowds out everything else, rather than the share of GDP itself. High spending damages growth when it is poorly chosen and financed by borrowing at full employment; well-chosen investment financed at low cost does the opposite.
Spending by function, UK 2025/26: HM Treasury country and regional analysis as published in Government Expenditure and Revenue Scotland 2025–26, Table 3.6 (social protection £407.3bn, health £257.5bn, debt interest £130.3bn, education and training £125.7bn, total £1,363bn); ONS public sector finances. The loanable funds market on the diagram is invented. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed.