Government Spending

Public Spending: A Centennial Perspective

Government spending refers to money spent by the public sector on the acquisition of goods and provision of public services such as education, healthcare, social protection, and defense.

The rise of government as an economic player was a major transformation that took place mainly in the second half of the twentieth century.

chiasmus diagram showing abba pattern Figure 1, Military vs. Non-Military Spending | Source: National Priorities Project Opens in new window

Figure 1, courtesy of the National Priorities Project Opens in new window, which gives the evolution of US federal spending since the end of the nineteenth century, shows the temporary spikes associated with wartime defense spending and the two major steps that led to secular increases in nondefense spending: President Roosevelt’s New Deal in the late 1930s and President Johnson’s Great Society in the 1960s.

Similar trends can be observed in most other economies, albeit at different times and to different extents. In Europe, government spending was already higher than in the United States at the beginning of the twentieth century — especially in Germany where Chancellor Bismarck had introduced social security to undercut the socialist movement. Its rise has not been uniform, as indicated by the example of Spain, where it only started after the transition to democracy in 1975.

Though government spending as a proportion of GDP is markedly higher in Europe than elsewhere in the world, it has stabilized (or, in the case of Sweden, has decreased after the financial crisis of the early 1990s). In the emerging countries, government spending is lower, but a clear upward trend can be observed.

Most of the increase in public spending has resulted from the rise of social spending — pensions, healthcare, income support, and unemployment insurance.

Transfers to individuals and the provision of public health services have increased massively.

At the same time, most governments have withdrawn from sectors such as manufacturing, telecoms, postal services, transportation, and, except for the temporary nationalizations of ailing banks in the aftermath of the 2008 crisis, financial services.

Overall, global privatization receipts from 1988 to 2014 amounted to nearly 3 trillion US dollars. State subsidies are also on the retreat, although they remain high in energy and agriculture.

A conclusion from these observations is that the conservative revolution launched in the early 1980s by Margaret Thatcher, the British Prime Minister, and US President Ronald Reagan did not succeed in reducing the size of the state, but contributed to redefining its scope:

In the advanced and a large part of the emerging and developing countries, governments nowadays are enforcers of the economic rules of the game, providers of universal services, and social insurers, but they are much less manufacturers, bankers, and venture capitalists than they once were.

However, this assessment does not apply to China, Russia, or the Gulf countries where state-owned companies are powerful economic players. State capitalism remains a strong force in a world where economic power is shifting.