NCPA - National Center for Policy Analysis

Perils Of Government Spending

July 18, 2000

Over the past century, government spending grew to an average of 45 percent of gross domestic product (GDP) among developed countries. But do these expenditures make countries more productive or achieve such social objectives as improving the health and literacy of the population?

While some government spending -- on roads, education and criminal justice, for example -- positively affects per capita GDP, beyond a certain point the tax burden necessary to finance this spending slows economic growth and thus retards the growth of per capita GDP. Today, total government spending in the United States (21 percent of GDP) and other developed countries far exceeds the level at which it increases national income.

Furthermore, there appears to be little difference in social outcomes among developed industrialized 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 about the same as in those with public spending above 50 percent of GDP. Specifically:

  • Advanced countries realize no benefit in terms of social progress (as measured by an index of indicators) from government consumption spending beyond $3,650 per person or 18.6 percent of GDP.
  • The optimal level of per capita government spending -- the point at which a dollar increase in public spending will buy a dollar's worth of additional improvement in social progress -- is $1,105 or 5.6 percent of GDP.
  • Thus optimal spending is about one-third of what these governments actually spend.
  • 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.

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

Source: Gerald W. Scully (NCPA senior fellow), "Public Spending and Social Progress," Policy Study No. 232, June 2000, National Center for Policy Analysis.

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