2.4 Growth of Government in Relation to the Economy

It is common knowledge that government expenditure seems to grow at a rapid rate. The unwary who consults some popular almanac might come up with some astronomical growth by taking the absolute money figures for government expenditure. For example, ‘shock-horror’ can be generated by pointing out that UK government expenditure was 20 times higher in 1998 compared with 1960, but our previous analysis suggests at least two reasons why such a figure would be misleading. The first is that the money growth might vary considerably depending on the definition of government expenditure used. If we take government expenditure on goods and services alone the rise over the same period is 24 times. The second reason is that such figures give no idea of the actual resources absorbed by government and the change in the purchasing power of transfers, for changes in prices are neglected. If we take account of price changes, i.e. inflation, then the constant price growth of general government expenditure over the same period is reduced to 2 times.

This preliminary list of pitfalls in presenting data suggests that we must be clear what the data are being used for. In Section 2.1 we justified examining the trend in growth in government in relation to the rest of the economy because that is the dominant factor in the analysis of the economic relations between government and industry. For this reason our starting point should be the ratios already presented in Section 2.3.1 and how these vary through time. The data are presented in Table 2.5 and Table 2.6.

Source: OECD, Historical Statistics, 1960–1997. 

Source: As for Table 2.5. 

2.4.1 Growth in Government Spending

Here is a summary of what seems to have been happening to the growth of government spending over the last 30 years in major Western countries.

1. There has been a modest average growth in the proportion of government expenditure on current goods and services.

2. When transfers are included, government expenditure growth looks very different. The rise in the percentage G/GDP is rapid throughout the whole period.

3. There are intriguing variations between countries. When the statistic examined is government expenditure on current goods and services, growth in the USA was modest alongside, say, Germany, whereas, when transfers are included, there is a remarkable convergence in the percentage, if we exclude Japan.

4. There is some preliminary evidence suggesting that G/GDP has stabilized.

There is no limit to the kind of data about government expenditure trends which can be produced or to the ways in which they can be examined. Tables 2.7 and 2.8, for example, answer questions about the growth in the types of government expenditure and in government employment.

Source: Compiled from Tanzi and Schuknecht (2000), Chapter 2. 

Table 2.7 exploits another measure of change – the ‘elasticities’ of expenditure by function. This measure is

The elasticities vary considerably by expenditure components with, on average, much higher elasticities (and therefore higher rates of growth) for ‘welfare state’ expenditures such as health and social security than for ‘traditional’ services of government such as defence.

2.4.2 Growth in Government Employment

Table 2.8 illustrates the complementary growth in government employment for our selection of countries. In 1960 government employment in most countries was less than 15 per cent of total employment but was considerably more by the mid-1980s.

Source: As for Table 2.5.