What gives? Household consumption patterns and the ‘Big Trade Off’ with public consumption

At the centre of politics in Britain and other countries is what is sometimes called ‘the big trade-off’ – where to strike the balance between private consumption and collective goods and social spending – and hence the sacrifices that would be entailed by the higher taxation required to fund otherwise desirable forms of social provision. In this paper we use aggregate national accounts data to compare the composition of household consumption between otherwise similar countries with higher and lower levels of public consumption. We concentrate in particular on spending patterns in ten countries where ‘total potential consumption’ (the sum of public and household consumption and household saving) is similar to that in the UK, using data from 2005. While the strengths of the inferences that can be drawn from a small number of countries are limited, overall these results suggest that there is a hierarchy in the forms of consumption that citizens of different countries sacrifice when they have greater government consumption (and so higher taxes). The trade-off at the margin is not with all kinds of consumption equally, but particularly with consumption of particular kinds – such as spending on restaurants and hotels, vehicle purchase, household furnishings, or clothing and footwear. But there are also items, such as education, where government spending may act as a substitute for what private households would have to spend. Such findings could colour our views of what the ‘big trade-off’ between public and private consumption really entails.