Public Spending And Social Progress

Studies | Federal Spending | Social

No. 232
Thursday, June 01, 2000
by Gerald W. Scully


Conclusions

Advanced countries can achieve maximum social progress, in the sense of marginal benefit equal to zero, with "maximum" per capita government consumption spending in the range of $3,970 to $4,380 - 20.2 percent to 22.3 percent of GNP, or "minimum" expenditures of $2,300 to $3,980 - 11.7 percent to 20.3 percent of GNP.

Optimal government consumption spending per capita, where the marginal benefit of social progress is equal to marginal government expenditure, is much lower, in the range of $605 to $1,830 or 3.1 percent to 9.3 percent of GNP. Thus:

  • Advanced countries do not benefit, in terms of social progress, from government consumption spending beyond $3,650 per person or 18.6 percent of GNP.
  • The optimal level of per capita government spending is $1,105 or 5.6 percent of GNP.
  • With the exception of Singapore (and Hong Kong, if the data were available), the world's most developed countries receive no gains in social progress for much of the GNP consumed by government.

Therefore, there is considerable scope for shrinking the size of the fiscal state without doing harm to social progress.

"On average, total public spending in the high-income countries is about 45 percent of GDP."

Of course, government is much larger than is necessary to maximize social progress or to spend resources to the point at which the marginal social progress equals the marginal government expenditure necessary to achieve it.25 On average, total public spending in the high-income countries is 45 percent of GDP. Almost all categories of real government budgets have grown, including government consumption, over the last four or five decades. But the high-growth sectors have been transfers and subsidies, social expenditures and interest payments on accumulated public debt.

Many explanations for the growth in the size of government have been offered: Wagner's law or Baumol's disease,26 interest group lobbying, insights from public choice theory and bureaucratic expansionism.27 Whatever the explanation, twenty-first century demographics make its current size unsustainable. Domestic population growth is below (often well below) replacement levels, resulting in aging populations that collect state-sponsored pensions for a long time and use a high fraction of national health resources. As fewer and fewer workers support more of society's members on at least one universal benefit, pressure builds to import more young workers from abroad (immigration on the required scale has implications for national identity), cut universal benefits or make work and investment more attractive by cutting taxes.

"Most developed countries can reduce the size of government with no adverse effects on their standards of living."

Some shrinkage in the size and scope of the fiscal and regulatory state seems inevitable. Appropriately fashioned, such shrinkage will not diminish social progress as measured by the indices constructed here, but redistributing the benefits and costs associated with shrinking the size of government implies considerable political difficulty. Only two governments to date have tackled the problem with some success:

  • 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.
  • However, the United Kingdom, where public spending was reduced to 40.7 percent of GDP in 1989, has since increased spending to about 45 percent.

Several European nations recently trimmed government expenditures to meet the criteria set by the Maastricht agreement for participation in the European single currency market, but the policy changes are marginal and are not part of long-term strategies to shrink the fiscal size of the states.

And what are the prospects of shrinking the size of the U.S. fiscal state? Citizens hate taxes but appear to love government expenditures more. Both political parties have grasped the reality that to get elected and to stay in office they must cater to the middle class, the largest recipients of public spending. While ideas do matter, rebellion and revolution or crisis are the only sources of dramatic change. The prospects for cutting government expenditure through full or partial privatization of social security, medical savings accounts, school vouchers, curtailment of farm subsidies and other corporate welfare and so on have never been better. Yet politicians and citizens alike prefer tinkering at the margin rather than fundamental reform.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.


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