The history of the composition of government spending is both complex and fascinating. Although government priorities have changed over the past 150 years, social spending has been the biggest ‘winner’. In the late nineteenth century, public spending focussed on public administration, investment, debt service and the military. In the following decades until about 1960, such growth focussed on developing public services and social safety nets, taking advantage of falling military spending after the two world wars. The following sixty years saw mostly further increases in social expenditure, especially on pensions, health and long-term care. Public spending on ‘goods and services’ has always averaged nearly half of total expenditure. By contrast, social expenditure has grown from less than 10% a century ago to 55% in 2017. Education spending has been stable at about 10% of total spending in recent decades, after rising strongly in earlier years. The share of public investment has been falling steadily, from 20% in the late nineteenth century to only 7% in 2017.

Government expenditure needs to be financed. The two ways to do so are via taxes or via deficits and debt. For the first 90 of the past 150 years, public expenditure broadly grew in line with revenue, except during wars and times of crises. This changed fundamentally in the 1960s and early 1970s as the ‘Keynesian revolution’ took hold.Over the past fifty years, revenue rose strongly, but public spending often increased even faster. Chronic deficits stoked a high and growing stock of public debt in much of the advanced world. Public debt in the largest countries is now similar to the level prevailing at the end of the Second World War. Future governments will also face significant liabilities from increasing public expenditure related to population ageing, as well as fiscal risks from the financial sector. These liabilities and risks imply higher expenditure which will need to be financed. At the same time, there are political and economic limits to both taxation and indebtedness.