NCPA - National Center for Policy Analysis


May 23, 2006

Two recent studies provide some insight into the overall argument: Is smaller government better for a country's well-being in areas other than the economy?

A group of Swiss and Danish researchers from the WIF Institute of Economic Research in Zurich looked at whether government involvement in the economy is conducive to life satisfaction across 74 countries.

According to the WIF researchers:

  • Life satisfaction actually decreases with higher government spending.
  • This negative impact of the government is stronger in countries with a left-leaning median voter.
  • It is alleviated by more effective governments -- but, crucially, only in countries where the state sector is already small.

Another study released by the Center for Policy Studies (CPS) in the United Kingdom found that modern governments that spend less can, indeed, provide better public services, a better standard of living and more equitable incomes than high-spending governments.

According to the CPS researchers:

  • In lower-spending countries, per-capita income was on average 12 per cent higher than in larger-government countries.
  • More importantly, the gap between the two types of economies is widening -- real gross domestically (GDP) grew more rapidly in the leaner countries.
  • Leaner governments reduced their tax and other receipts, as a proportion of GDP, by an average of 6.5 percentage points over the last two decades while larger governments grew their tax and other receipts by an average of 4.8 percent.
  • At the same time, between 1997 and 2005, it grew at an average annual rate of 4.1 percent in the former group of countries compared to 1.9 percent in the latter.

The lesson is a simple one, says Tech Central Station: If the real objective of European governments is to improve social and personal well-being, they should lower taxes, cut state spending and let the private sector do its job.

Source: Constantin Gurdgiev, "Less Is More," Tech Central Station, May 22, 2006; based upon: Christian Bjørnskov, Axel Dreher and Justina A.V. Fischer, "The bigger the better? Evidence of the effect of government size on life satisfaction around the world," WIF - Institute of Economic Research, Working Paper 05/44, October 2005; and Charlie Elphicke and William Norton, "The case for reducing business taxes," Center For Policy Studies, February 2006.

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