NCPA - National Center for Policy Analysis

THE IMPACT OF GOVERNMENT SPENDING ON ECONOMIC GROWTH

May 12, 2005

To avoid becoming an uncompetitive European-style welfare state like France or Germany, the United States must adopt a responsible fiscal policy based on smaller government, says Daniel J. Mitchell, senior research fellow at the Heritage Foundation.

Large government sectors reduce both the level of economic activity and the rate of economic growth, he says. Additionally, government spending undermines economic growth by displacing private-sector activity. Whether financed by taxes or borrowing, government spending imposes heavy extraction and displacement costs on the productive sector.

Mitchell says comparisons between countries help to illustrate the impact of public policy. Government spending consumes almost half of Europe's economic output -- a full one-third higher than the burden of government in the United States. Among the more startling comparisons:

  • Per capita economic output in the United States in 2003 was $37,600 --more than 40 percent higher than the $26,600 average for the EU-15, which are the 15 member states of the European Union prior to the 2004 enlargement.
  • Real economic growth in the United States over the past 10 years (3.2 percent average annual growth) has been more than 50 percent faster than EU-15 growth during the same period (2.1 percent).

Mitchell says blaming excessive spending for all of Europe?s economic problems would be wrong, since many other policy variables effect economic performance. However, after considering many of the other variables, he still finds a strong correlation between bigger government and diminished economic performance.

Mitchell concludes that a large and growing government is not conducive to better economic performance. Indeed, he says, reducing the size of government would lead to higher incomes and improve America's competitiveness.

Source: Daniel J. Mitchell, "The Impact of Government Spending on Economic Growth," Backgrounder No. 1831, Heritage Foundation, March 31, 2005.

 

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