From the TUC

Government spending and prosperity

31 Oct 2012, by in Economics

Is high government spending bad for prosperity? If you live in a country where government spending is a high proportion of GDP, is that going to make you and your family poorer? It’s often assumed that it will, but a government project has provided data that suggests not.

The latest report from the government’s project to measure national well-being came out today. I’ve blogged about these reports before because they look at a different set of outcomes from those we’re used to. Today’s report looks at “governance”, and one of the reports “key points” is

In the UK in 2010, half (50%) of GDP was spent by the Government on a variety of public services compared with the average of 46% for 34 countries in the Organisation for Economic Development.

Going by past experience, some people will be very angry about this. But take a look at the figures for government spending as a proportion of GDP in OECD countries:

A couple of points immediately suggested themselves to me. The most important was prompted by the fact that Ireland is top of the table – there’s a strong link between government spending and the state of the economy. The “automatic stabilisers” (especially social security) will be working hardest in the countries that have been hardest hit by the global crisis and those countries will have shrunken economies so the proportion of GDP that takes will be doubly high.

The second point is that, if you look at the countries above us in this table, it doesn’t look like such bad company. I’m happier with an economy similar to those on the left hand of this table than on the right.

And with this thought I went back to the last report in this series – on the economic aspects of national well-being. This included a comparison of household actual income per head in the EU (taking disposable income and the value of public services to families into account). A majority of the countries in the table are also covered by that comparison, so I thought it might be interesting to produce a scatter chart for those countries in both sets.(*)

The data are for 2010. The lines divide the chart into high and low actual household income per head and high and low proportion of GDP accounted for by government spending. Most countries are either in the low income/low spending or the high income/high spending quarters, and most of the rest are very close to the boundary.

Of course, there are other factors that influence this connection – as I said earlier, the extent to which countries were hit by the global crisis makes a huge difference. And, even if there is a causal relationship, we don’t know it’s direction (being better off may lead electorates to want the government to spend more, for instance.)

 But the notion that high government spending is necessarily bad for prosperity certainly isn’t supported by these results.

(*) Austria, Belgium, Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Ireland, Italy, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom.