Nathan Newman
Thu, 25 Sep 1997 09:37:56 -0700 (PDT)
An interesting article from THE ECONOMIST on the growth of the state and public spending, despite all the rhetoric of the "end of government." ---- SPEND, SPEND, SPEND Sept. 20-28 DID somebody say the age of big government was dead? At the beginning of this century government spending in todays industrial countries accounted for less than one-tenth of national income. Last year, in the same countries, the governments share of output was roughly half. Decade by decade, the change in the governments share of the economy moved in one direction only: up. During war it went up; during peace it went up. Between 1920 and the mid-1930s, years of greatly diminished trade and international economic contact, it went up. Between 1960 and 1980, as global trade and finance expanded, it went up. Between 1980 and 1990, as this breeze of globalisation became a strong wind, it went up again. Between 1990 and 1996, as the wind became a gale, it went up some more Among the rich industrial countries, America and Japan have the smallest governments. Last year their public spending was 33% and 36% of GDP respectively. Even so, both have shared in the consistently upward trend of state spending (except that in Japan, unlike almost every other country, spending was higher just before the second world war than it was in 1960). In America, government spending in 1913 accounted for less than 2% of the economy; by 1937, it was still only 9%. Since 1960 Americas government has grown by about a fifth, a comparatively modest rise. Internationally, the average increase over that period was more than three-fifths, while public spending in Japan more than doubled. The point is that government everywhere has grown, and kept on growingeven in those countries where, by todays standards, government is small. Big government, far from being dead, is flourishing mightily. Against the tide True, there are exceptions. Sweden, where in 1993 the governments share of the economy had been 71%, has since repudiated its social-welfare model and cut public spending savagely, to just 65% of national income last year. Or look at the extraordinary transformation in Britain. In 1980, when Margaret Thatcher began wielding her Conservative axe, public spending accounted for 43% of the economy. After nearly 20 years of ruthless cuts, radical dismantling of the welfare state and hard-faced suppression of public-sector unions, the states share has shrivelled to just 42%. Sickened in the end by this remorseless brutality, the British electorate earlier this year swept Labour back into power with a landslide majority. Since 1994, many European governments have been trying to curb their budget deficits in order to satisfy the fiscal-policy criterion laid down in the Maastricht treaty on European monetary union. That may have helped to bring average public spending in Europe down a little last year compared with two years earlier. Even so, last years average was higher than that in 1990 (which in turn was higher than that in 1980). Public spending in France last year was 55% of the economyafter cuts that cost the government an election earlier this year, but actually did no more than hold the total steady. In Belgium, despite supposedly heroic efforts at retrenchment, public spending was still 54% of GDP. In Italy and Austria too the figure was well over 50%. <Picture><Picture><Picture><Picture>The trend towards bigger government in the industrial countries has been almost universal (see table 2 above). One way of finding out why this should be so is to look at the composition of spending. The total falls into four broad categories: (a) government consumption, measured by what the state, as a supplier of services, spends on wages and other inputs; (b) public investment; (c) transfers and subsidies; and (d) interest on the national debt. For the industrial countries as a group, between 1960 and 1990 public spending as a proportion of national income fell in only one of these categories: public investment, down from an average of 3% of GDP to 2%. Of the other categories, debt interest has grown most quickly. Next fastest-growing, and much the biggest category, were transfers and subsidies, followed by public consumption (see chart 3). The engine room These numbers, broad averages though they may be, are revealing. Consider first the exceptionally sharp rise in debt interest. This reflects the build-up of government debt, caused by an accumulation of government deficits. But what is behind those deficits? In the short run, governments may borrow to finance their activities instead of collecting taxes to pay for them all, as a way to stabilise the economy as it moves through the business cycle. If that were the only motive, however, deficits during recessions (as governments spend more than they collect in taxes) would be balanced by surpluses during recoveries (when the opposite is true), and there would be no build-up of debt over decadeswhich is what has actually happened. Deficits have become more or less permanent. This is a sign that governments are persistently spending more than citizens can be persuaded to pay in taxes. Spending on public consumption (that is, on services such as defence, law and order, education and health) has risen substantially not only in inflation-adjusted terms but also in relation to the size of the economies. Remember that economies have been growingbetween 1960 and 1990, by an average of 3.7% a year in the industrial countriesso government has been consuming a rapidly growing slice of a rapidly growing pie. That would seem to suggest an enormous rise in the quantity and quality of the services provided. But multiplying the change in GDP by the change in the share of GDP devoted to government consumption merely provides a figure for the growth in the cost of delivering public services. It says nothing about the volume. Economists who have studied the public sector have long noted that productivity there rises much more slowly than in private business. (They have even given a name to this oddity: Baumols disease.) A good part of the enormous increase in resources devoted to public services can be explained by that slow-rising productivity. That may be why most voters in most countries appear to believe that, despite the huge growth in spending on public services, improvements in recent years have at best been modest. The most important cause of the states expansion since 1960, however, is the growth in transfers and subsidies. These include income support, benefits for the unemployed, disabled and single parents, and above all pensions: altogether, the cash-in-hand sector of the modern welfare state. In the United States, subsidies and transfers in 1937 accounted for 2% of GDPa figure that already reflects growth in spending after the Great Depression. By 1960 they had reached 6% of the economy; now they stand at 13%. In Britain, subsidies and transfers in 1937 were already 10% of the economy, far higher than elsewhere. By 1960 they had increased to 14%; today they account for roughly a quarter of the economy. By 1960, however, Britain had lost its commanding lead in the welfare-state race; and by 1970 France, Norway, Sweden, Belgium and the Netherlands had left it far behind. The spectacular growth of the transfer state explains (in a statistical sense, at least) something that at first sight seems very odd: that the state has grown fastest when the pressure to do so has seemed least acute. Asked which event this century has done most to drive up public spending in the advanced economies, most people would probably say the Great Depression, or the world wars, or the development of state-run health and education systems in many countries after 1945. And indeed all those factors played a part in enlarging governments, but none of them was the single most important. Only in America might an event in the 1960s spring to mind as a candidate: the Vietnam war. The timing is right. Much the most powerful impetus for growth in public spending came after 1960, but before the oil shocks of the 1970s. However, Vietnam does not fit the bill even for America: higher defence spending is an increase in government consumption, and nowhere was growth in that category of spending the biggest factor in pushing up the total. Instead, the most powerful change this century was the explosive growth in transfers after 1960, a shift that occurred at about the same time in almost all industrial countries. This was not a response to some crisis, but the very opposite: an unforced act of policy at a time of rapid economic growth and relative political stability, often regarded fondly as a golden age.