You might remember that I took issue, at some length, with a Policy Exchange piece that argued how we would be better off if the Government started cutting the state down NOW. In "A balancing act" we took a different view: slash government demand immediately and you'll make the recession far worse.

Now it seems that they have somehow come out with the idea that the private sector has shrunk since 1998 : here it is reported in the Telegraph.

Luckily the blogosphere has David Smith to correct economic errors:

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.

Working in the markets gives you a rule of thumb that usefully corrects the impulse to go off and trade on an 'obviously great idea': when you get a result that seems a bit too good to be true, it probably isn't.  Incidentally, our government is quite upfront about how much it consumes: here is a table from the Budget in this PDF (table 1:12)

Most of the decisions about where to allocate economic value are still being made by private individuals. A lot are determined by foreign customers.  Government is not crowding out anything.  It is important to distinguish spending (which includes a lot of transfers to people who then privately spend the money) and consumption (where the government makes the consuming decision, albeit on behalf of the voters who then 'consume' whatever public good the government provided).

I still think that we are near the limit of how much the government should be either consuming or redirecting - the latter is not harmless either.  But this can't be proven with misleading statistics.