The study of the causes of government growth is a hot subject because it tests the skills of economists in model building and econometricians and statisticians who devise means for empirical testing. Their results only influence business decisions in an indirect way, notably in the presentation of background information for the speeches of business executives who wish to make pronouncements about public policy issues, particularly on the consequences of government growth. Sections 2.5 and 2.6 give a general idea of how government growth might be analysed.
How does one approach the study of growth? Imagine that you are writing a history of your own firm or organization. You might begin by a description, as already offered for government in the earlier part of this module, which shows how the firm has changed both in the amount and scope of its activities and, using statistical indicators such as the growth in revenue, in the composition of that revenue as the product mix changes, and in the amount and composition of the work force. In examining these changes, you would evaluate the influences on the decisions of the firm's management. These influences might be classified into changes in demand conditions (and the extent to which these were altered by the firm itself through marketing) and changes in supply conditions (which again might be classified into external factors beyond the control of the firm, such as raw material prices, and those within its control, such as in-house changes in technology). Through time the degree of influence of these conditions would be likely to vary. This approach is quite a good way of appreciating the similarities and the differences between the growth of a firm and the growth of government.
A word of warning is necessary. In a world in which there is rapid change in business environment resulting from globalisation, takeovers and mergers complicate the problem of tracing growth of individual business through time. Even governments are subject to major influences which produce breaks in the continuity of change, notably when territorial boundaries are altered.
Consider demand factors. As the economy grows, there is a complementary demand set up, alongside industrial and manufacturing expansion, for transport and communication services, energy, and waste disposal. As our discussion above suggested, it is commonly claimed that governments, central and local, have a comparative advantage in provision of such services. This view was the centre of late nineteenth-century speculation about the growth of government and was widely supported by industrial pressure groups as the justification for government expansion as the economy grew. However, as we have seen, such a hypothesis would not explain the relative expansion, particularly after World War II, in social services and transfer payments. While demand pressures from industrial firms to expand economic services, e.g. roads, might command the general support of individual voters, particularly if it were claimed that their employment in industry and in government would depend on it, the benefits would seem intangible alongside money payments to individuals or health services which require direct contact between government and the individual. This accounts for the addition to the list of demand factors influencing government growth of the power of the voter, which accompanied the extension of franchise in many countries in the course of the twentieth century. This extension took the form of gradual enfranchisement of the relatively poor who could try to use their voting power to exploit the government as a mechanism for redistributing resources from the relatively rich towards themselves. This hypothesis raises the question: what happens when the franchise cannot be extended any further and increasing redistribution reaches the stage where those who seek more social benefits can only obtain them by taxing themselves? Presumably this would have an effect similar to a rise in the relative price of some goods against the consumer/taxpayer. It would place a limit on the growth of government (i.e. G/GDP would converge to some limit). If this were true, then governments would lose voter support if they put forward future plans for increasing G/GDP. This does not seem to happen.
This is where the analogy with the activities of a firm finally breaks down. Firms cannot finance their sales by compulsory levies on purchasers, though they may get close to it, for a while, if there is no rival producer of their product. Firms can be taken over if shareholders vote the management out of office, just as voters can vote in alternative governments. But whichever government is in power, it can prevent competition in the ‘government business’, whereas firms will have to be prepared for new entrants who may compete alongside them and may lower their market share. So far as the growth of government is concerned, the government therefore has extra weapons at its disposal to promote its own expansion. It can incur debt to finance further expansion, with the assurance that it can tax future generations of voters, if the present generation allows it, in order to pay off its debts. An interesting case is pension provision. The voting and working population of today can support improved pensions for themselves in the future without having to make a contract with those who will have to pay for them – future voters.
In advanced democracies, it is clearly the case that a necessary condition for expansion of G/GDP is voter support, just as a necessary condition for a firm to expand is an increasing demand for its products. But the existence of that demand is not a sufficient condition.
The fact that governments can prevent competition in the ‘government business’ (see Section 2.5.1) suggests that supply factors may play a part in government growth. Monopoly provision of important services, particularly defence, and compulsory financing blunt the incentive to be efficient, as happens in the case where private companies have a substantial monopoly, particularly one protected by government regulations or by tariffs which inhibit foreign competition. However, to affect the growth in public expenditure, it must be assumed that somehow productivity gains are less likely to be characteristic of government services than of the private sector. This assertion is not so easy to justify. It has been claimed that there are technical factors preventing the growth of productivity in the public sector relative to the private sector because personal attention is an important part of the service. This would mean that productivity gains resulting from the substitution of machines for people, or from changes in technology, would be denied to public services. This argument certainly does not apply to defence services, and could not apply to transfer payments which are not government-produced services. If it applies at all, it must be to such services as education and health which are certainly government-produced services, but it would be difficult to argue that these are services where new technologies which are cost-effective could not be introduced. This suggests that the incentive to introduce such changes in productive techniques could be lacking. Why should public service unions support changes which would reduce the demand for their members' services? Why should public sector managers insist on making such changes in the teeth of union opposition, if the government has the power to raise extra taxation as services expand?
Clearly, the most that a short discussion of the determinants of government growth can convey is some idea about how to draw up a check-list of relevant influences. If there is one general point to be made, it is that one must be able to trace these influences to individual or collective decisions and note how these are translated into demand for and supply of government services at different points in time. Explanations which regard the ‘government’ as some kind of impersonal referee acting to serve the interests of the community are divorced from reality. The relations between government and industry are relations between people. These relations are markedly affected by the division of function between government and the private sector; a knowledge of how this division of function has changed, and of the influences which have caused that change, should leave you better prepared to understand the later analysis.
