Real government consumption expenditure

The main areas of government expenditure are pensions, healthcare, welfare and education. These four areas account for more than 60% of government spending. At the 2014 Budget, the government announced the Welfare Cap, a cap that applies to welfare spending in AME with the exception of the state pension and the automatic stabilisers. Introduced in 2015-16, the cap was set at £119.5 billion. Subsequently, the Government revised its approach to the welfare cap in Autumn Statement 2016. The new approach means that spending on welfare must be within the cap and a 3% margin in 2021-22. The UK government has reverse spending cuts implemented by previous administrations which has increased spending. The chancellor has indicated that the era of austerity has ended as of the March 2020 budget, which is expected to increase government consumption expenditure with immediate boosts to consumption for certain areas.

Over the five years through 2022-23, government consumption expenditure is expected to increase at a compound annual rate of 4.3%. Expenditure was increasing throughout the three years prior to 2020-21. Despite the increased costs due to the COVID-19 (coronavirus) outbreak, such as on healthcare for vaccines and personal protective equipment, overall consumption expenditure fell substantially. This is despite large rises in health and education spending and due to how real expenditure is measured, with output falling while government consumption rose by 16% in nominal terms over the first quarter of 2020-21.

At the 2021 Budget on 3 March 2021, Chancellor Rishi Sunak, set out £65 billion worth of government spending to continue to mitigate the economic shock of the COVID-19 (coronavirus) pandemic, while also laying the foundations for a post-coronavirus economic recovery. The main focus of the 2021 budget is on the protection of jobs, largely through the extension of economic support. This included extensions to furlough, self-employed support schemes, business grants and VAT cuts, which will bring total fiscal support for tackling the pandemic to £407 billion, further increasing headline debt to more than 100% of GDP. The budget also laid out plans for an investment-led economic recovery and future changes to strengthen public finances.

Alongside the Budget, the Chancellor detailed the latest economic and fiscal outlook published by the Office for Budget and Responsibility (OBR), which previously forecast GDP growth of 6.5% in 2021, following a record yearly decline GDP decline of 9.9% in 2020. However, according to the ONS, UK GDP beat this, growing by 7.4% over the year through 2021. Consequently, real government consumption expenditure rose by a rather significant 15.9% in 2021-22.

However, over the current year, the Bank of England (BoE) have announced that GDP growth in the United Kingdom is slowing. The latest rise in gas and energy prices, predominately caused by the conflict in Ukraine, has led to another significant deterioration in the outlook for activity in the United Kingdom. The UK economy is now projected to enter recession from the fourth quarter of 2022. The UK economy is expected to contend with rising inflation, supply chain difficulties, energy price surges and dampened business confidence, exacerbated by Russia's invasion of Ukraine. The United Kingdom's annual inflation reached a four-decade high of 10.1% in July 2022 amid rising food and energy prices, the highest among G7 economies. In response to rising inflation, the BoE raised the official bank rate to 0.25%, 0.5%, 0.75%, 1.25% and 1.75% respectively in December 2021, February 2022, March 2022, June 2022 and August 2022. With significant macroeconomic uncertainties over the current year, IBISWorld estimates that real government consumption expenditure will rise by 7.6% in 2022-23, to reach £500 billion.