Converging on the US: trends in government spending

I was dipping into the latest update of the OECD Outlook database, and landed on the tables for government current spending and revenue as a share of GDP.

Spending first. I’ve shown here the shares for the US, New Zealand, and for a median of the OECD countries for which the OECD has data all the way back to 1970. Unfortunately, the New Zealand data aren’t available before 1986 – which was probably about the time government spending as a share of GDP peaked here.

gen govt disbursements.png

What I found interesting was how general government spending as a share of GDP in New Zealand has converged with that of the United States. Back in 1970, the United States was only just below the median for the other member countries for which there is data all the way back.  Now, both New Zealand and the United States are well below the median (whether for this sample, or for the whole OECD – for which group the median is now 42.6 per cent). The role of the US government in its economy may, in effect, be even larger than that in New Zealand, since there are so many “tax expenditures” in their system. Mandated private spending, such as that under Obamacare, would also add to the effective US total.

Of course, our government accounts are close to balanced, and those of the United States are not. When we look at current government receipts we are about half way between the US and the OECD median.

gen govt receipts.png

What about changes over the last few years? For all the talk of austerity, in only two OECD countries – Hungary and Poland – is current government spending as a share of GDP lower this year than it was in 2007, the last pre-recessionary year. In New Zealand, for example, general government spending this year is estimated to be almost a full percentage point of GDP higher than it was in 2007. At the other end of the chart, 11 of these 29 countries have government current spending five percentage points or more higher than it was in 2007. Check out Finland – an increase that almost defies belief over such a short period, at least outside wartime.

spending 07 to 15.png

And what of taxes? The median country is estimated to have seen almost no change in the government revenue share of GDP since 2007. New Zealand is among the countries with the largest reductions, but then we were running surpluses prior to the recession. Greece has, quite remarkably, managed a very large increase in the revenue share of a falling GDP.

receipts 07 to 15.png

Most of the countries with large increases in the government spending shares are still estimated to have material negative output gaps. In principle, an eventual recovery might help shrink the relative size of government. But, for most, it is not remotely clear where the sustained recovery is going to come from, and when.

On which note, for a bit of gloomy weekend reading, I suggest Ambrose Evans-Pritchard’s piece on Finland. The tragedy of the euro, compounding what would in any case have been a difficult economic adjustment.

8 thoughts on “Converging on the US: trends in government spending

  1. Even at 37% of spending, one wonders how the government manages to spend that money. Whenever I look at the budget I am surprised anew at how relatively little our quite decent free education and health system costs. It’s the cost of all the other stuff that amazes.

    Like

    • Recall that 10% of the working age population is on welfare benefits, and then there is the universal pension paid to those 65+.

      I also find the US vs NZ comparison striking in that the US spends much more more (% of GDP) on defence than we do – I think something like 4% vs 1%.

      Like

    • The largest areas of total Crown expenditure for the 2014/15 financial year were:

      Social security and welfare: $28.2 billion
      Housing & Community Development: $1.1 billion
      Health: $14.7 billion
      Education: $13.5 billion

      Total Government Expenditure 2014/15 is $94 billion

      Like

  2. I guess, in theory, the recovery in developed nation growth should be driven by private investment, given the combination of historically low interest rates and high corporate profits (and in general, combined public and household balance sheets look debt heavy). But it appears ‘something’ is holding back investment and perhaps governments need to look at policies that can spark the private sector into action e.g. The Northern Powerhouse idea

    But, ‘labour market flexibility’ is often demanded by the corporate sector and this seems to remain an ongoing issue in certain advanced nations and especially across the euro area e.g. the IMF notes that Finland suffers from ‘labour market duality’ and Draghi has often referred to the ‘insider’ versus ‘outsider’ tension across EMU labour markets (see link 1). No quick fix there.

    Also, ‘investment’ requirements these days seem to be changing from tangible to intangible given the shift toward service oriented sectors as economies mature and perhaps this is a new challenge. To that end, a recent speech by the BOE Chief Economist (see link 2) suggested a change in approach to education might be required (though, skilled tradesman will always be needed) and a policy mix of ‘relax, retrain and redistribute’ might be a new combination for consideration. Again, easier said than done!

    http://www.ecb.europa.eu/press/key/date/2013/html/sp130523_2.en.html

    http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech864.pdf

    Like

  3. I guess, in theory, the recovery in developed nation growth should be driven by private investment, given the combination of historically low interest rates and high corporate profits (and in general, combined public and household balance sheets look debt heavy). But it appears ‘something’ is holding back investment and perhaps governments need to look at policies that can spark the private sector into action e.g. The Northern Powerhouse idea

    But, ‘labour market flexibility’ is often demanded by the corporate sector and this seems to remain an ongoing issue in certain advanced nations and especially across the euro area e.g. the IMF notes that Finland suffers from ‘labour market duality’ and Draghi has often referred to the ‘insider’ versus ‘outsider’ tension across EMU labour markets. No quick fix there.

    Also, ‘investment’ requirements these days seem to be changing from tangible to intangible as the shift toward service oriented sectors continues and perhaps this is a new challenge. To that end, a recent speech by the BOE Chief Economist (see link) suggested a change in approach to education might be required (though, skilled tradesman will always be needed) and a policy mix of ‘relax, retrain and redistribute’ could be a new combination for consideration. Again, easier said than done!

    http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech864.pdf

    Like

  4. Unfortunately, social welfare is the price of freedom. We either pay social welfare or we pay for armed bodyguards, armed police officers and barb wire.

    The government pay $2billion of accommodation supplement is not to the benefit of landlords. It is to the benefit of tenants. It is intended to pacify the poor so that they do not resort to violent revolution.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s