Optimal government spend is just 35% of GDP, say EconPol researchers

Research from EconPol Europe, linked to the recent findings of the Data Envelope Analysis on efficient public expenditure, finds there is significant scope for expenditure savings for governments in advanced economies, with the “optimal” spend being just 35% of GDP.

The results suggest that many countries would benefit from smaller government, and that countries should pursue forms of institutions and policies to achieve savings. However, the report’s authors António Afonso and Ludger Schuknecht warn that population aging and financial instability are important fiscal risks, notably for short- and long-term fiscal sustainability, that are certain or likely to materialise and raise public expenditure even further in the future.

“Governments do not need to spend more than 30-35 or at most 40% of GDP to do well and keep more money in the hands of their citizens,” say the authors. “Experience shows that this size of government is not some pipe-dream number but it is realistic and reachable for advanced economies.

“There is a huge variation in performance and efficiency across countries. In some countries with big but well-functioning governments and strong policy programs, such as the Nordics, more spending may be less costly in terms of taxes, growth and employment. Whether the more equal income distribution is worth much higher spending – 10% of GDP or more – and more unemployment is a matter of judgement.

“Naturally, on which policies and sectors public money is going to be spent is a decision linked to the choices of citizens and taxpayers.”

Using descriptive analysis of various government performance indicators in relation to public expenditure to provide indications of overall “optimal” across spending categories, researchers found that the highest savings potential is in the biggest expenditure categories, public consumption and social expenditure.

Read the full paper: http://www.econpol.eu/publications/working_paper_23