Public Spending And Social Progress
Table of Contents
Over the past century, government spending grew to an average of 45 percent of gross domestic product (GDP) among developed countries. These expenditures often are defended on the ground that they make countries more productive and achieve such other social objectives as improving the health and literacy of the population.
In a previous study, the author showed that government spending on such things as roads, education and criminal justice positively affects per capita GDP. But beyond some level - 21 percent of GDP in the United States, for instance - the tax burden necessary to finance this spending slows economic growth and thus reduces per capita GDP below what it otherwise would be. Today, total government spending in the United States and other developed countries far exceeds the level at which it increases national income.
This study examines the effects of government spending on certain noneconomic measures of social progress. It employs a narrow measure of social progress obtained by constructing an index based on literacy, infant mortality and life expectancy plus a broader index that uses 16 social indicators. It includes data on 112 countries collected for 1995.
The central finding is that although government spending has a positive impact on social progress up to a certain level, spending by most developed countries has gone well beyond that point. As a result, there is little difference in social outcomes among these countries, regardless of the amount they spend. Social progress in developed countries that spend less than 40 percent of GDP - the United States, Switzerland, Japan, Australia and New Zealand - is approximately the same as in those with public spending above 50 percent of GDP. Specifically:
- Advanced countries realize no benefit in terms of social progress from government consumption spending beyond $3,650 per person or 18.6 percent of GDP.
- Beyond $1,105 or 5.6 percent of GDP - the optimal level of per capita government consumption spending - each dollar spent buys progressively less additional improvement in social progress.
- Yet some advanced countries are spending as much as $5,308 per capita on government consumption aimed at advancing social progress.
- With the exception of Singapore (and Hong Kong, if the data were available), the world's most developed countries are receiving no gains in social progress at the margin from government spending.
Clearly, there is considerable scope for shrinking the size of the fiscal state without doing harm to social progress. So far, among developed countries only Ireland and New Zealand have made observable progress in shrinking the fiscal state.
- Ireland reduced public spending as a share of GDP from 47.2 percent in 1988 to 40.6 percent in 1989 and has more or less held the line since then.
- New Zealand shrank central government public spending from 40.4 percent of GDP in 1992 to 34.9 percent in 1995.
Other developed countries will face increasing pressure to follow suit as the pool of workers available to support their aging populations shrinks.