The UK Private Sector Hasn’t Shrunk

Yesterday’s Sunday Telegraph contained an article, based on research from the think tank Policy Exchange, that Britain’s private sector will be smaller next year than it was in 1998. Fascinating and alarming, if true. The article is here. The economic output of the private sector next year will be an inflation-adjusted £706.1 billion next year, it said, compared with £708.9 billion in 1998-99.

Fortunately it isn’t true. The Policy Exchange calculations were based on a popular misconception, that of assuming government spending has risen to around 50% of GDP. Spending may be equivalent to 50% of GDP but that includes transfer payments that are not part of GDP. The G that goes into the national income identity – G + C + I + X – M – is around 20% of GDP (general government spending), plus government capital spending. The public sector has grown too much but it hasn’t crowded out the private sector to quite that extent.

So what has happened to private sector output? The Office for National Statistics’ estimate of market sector output was 27% higher in volume terms in the first quarter of this year than in 1998. It may fall a bit from there but it will still have shown considerable growth, as you would expect.

Originally published at David Smith’s EconomicsUK and reproduced here with the author’s permission.