We have still to work out what is a good size for government

It helps to understand that our ideas about the role of the state have changed dramatically over time

In 30 years’ time the size of our government may be quite different to how it is now (Corbis)

What do we want government to be? Ultimately, it is a choice for a people, not for politicians. But the Spending Review on Wednesday will show a politician’s best shot at gauging what the British electorate wants, deep down, from government, for George Osborne is perhaps the most political of all post-war chancellors. What governments do has to be sustainable, and that is clearly recognised by the electorate, as we saw in the last election. If spending and revenue have to be in broad balance, the overriding question that remains is how much of a country’s national income should be allocated by government and how much should be spent by people themselves.

Answers to both questions vary between countries and change over time. Britain, averaging a bit below 40 per cent of GDP going through government, is in the middle of the pack as to size of government: smaller than France and Scandinavia but bigger than the US, Japan or Australia. There is no right or wrong level, but the whole row about “cuts” has led to the charge that Britons want a Scandinavian level of public services but are prepared to pay only a US level of taxes. However, the differences between countries are less marked than the changes over time.

At the beginning of the 20th century, most developed countries had governments that spent, and raised in taxation, between 10 and 15 per cent of GDP. That shot up as a result of the First World War – in the case of the UK to 50 per cent – fell back to around 25 per cent, and then shot up again in the Second World War to 60 per cent of GDP. In the UK, it settled at about 35 per cent of GDP under the post-war Labour government, nudging up a bit in the 1970s and early 80s, before falling back to 36 per cent in 2000. Spending then began a rapid rise under Gordon Brown, but taxation was not increased to pay for it and that increase is now being reversed.

The big point here is that in the first half of the 20th century there was a transformation not just of the size of governments, but of people’s ideas about what they should and shouldn’t do. Two world wars forced governments to increase both spending and taxation; but, in the relatively peaceful 50 years that followed, spending stuck at a much higher level than it had been in 1900. People wanted bigger government, or at least the services they received from bigger government, and accepted that they would have much smaller discretionary spending themselves.

Compared with the revolution between 1900 and 1950, the changes between 1950 and today have been quite modest. Expenditure crept up a bit until about 1980 but has levelled off since. This goes for most of the developed world. How money is spent has varied – more on health and education, less on defence and debt service – but the overall numbers have changed far less. The reason is that the tax base has been pretty stable. In the UK, it has been remarkably so – if you knock off North Sea oil revenues, British taxpayers have contributed around 35 per cent of GDP for the past 50 years. The government has some other revenues, so can spend, perhaps, 37 per cent of GDP without adding to the national debt. Osborne has made the same judgement that Brown made in his early years as chancellor: that this is the practical limit of what there is to spend.

But is this right? Will ideas of what governments should be doing shift again, and in which direction?

First, the case for bigger government. The UK has somewhat better growth prospects than most of continental Europe and much better than Japan. But given the pressures on our government, not just from an ageing population but public pressure for better healthcare, 37 per cent of GDP may not be enough. Some things that this Government and the previous coalition have done have led to significant improvements in the efficiency of public services, and that has helped. It may be that the Spending Review will enable it to preserve reasonable services despite a further squeeze on costs. But if you look 10 or 20 years down the line, the government may simply not have enough money.

Now the case for smaller government. There are many advanced societies around the world where government is smaller, sometimes much smaller: in Europe, there is Switzerland; in Asia, South Korea and the extreme examples of Hong Kong and Singapore, where government is around 15 per cent of GDP. These are successful, rich societies – in some cases, richer than our own – and with greater economic freedom.

This is not to advocate either bigger or smaller government, simply to point out that what we regard as normal may be quite different in 30 years’ time. We will catch a feeling for how far our current model can be pushed on Wednesday.