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Cheerful News About Government Spending
Samuel Cohn is an atypical writer. I think that government spending is a great thing. I think that that taxes are a great thing. In several other essays on this website, I have made various arguments about all the great things that governments do. They maintain our defense. They insure the population is educated. They finance the scientific research that is the basis of national technological advantage. They provide the infrastructure without which the economy would crumble. They provide economic investments for long term growth that the market would not be likely to provide on the short term.
Free markets are great, but then so is air. You need air to survive. You also need food. The capitalist free market is the greatest economic growth machine that has ever been created in history. Government expenditure patches things here and there for the handful of necessary jobs that private corporations just can’t do.
Which brings us to the cheerful news which I report today.
Other writers on government expenditure – including myself in an earlier manifestation – believed that government expenditure was doomed. If you are a social scientist, think about the discussions of “neoliberalism” or the “Washington Consensus”. If that means nothing to you, think about the various “shrink Big Government” movement that is associated with the Republicans and with other conservative parties worldwide. Many of these groups were politically ascendant and were instituting policies such as tax cuts that could wreak hell with the effectiveness of government programs.
The good news is that at least as of 2011, the neoliberals and government-shrinkers are actually being fairly ineffective at reducing the size of government. Governments still seem to have the money to run public programs – and the public programs are getting the monies they need.
The data for this comes from the International Monetary Fund which maintains a website on government fiscal prudence and profligacy. www.imf.org/external/datamapper/datasets/FPP/1
They have various measures of government spending as a percentage of GDP which they have tracked for all of the nations of the world since 1800. (No duh, most nations don’t have data for early periods, so don’t expect information miracles.) I pick up the story from 1981, just when the Reagan-Thatcherite cut-big-government movement was getting started among the wealthy nations. (Technically, the leadoff government shrinker was General Pinochet in Chile in 1973).
The table below shows trends in government expenditure on everything except debt interest as a percentage of GDP from 1981-2011. Paying interest on the government debt is something governments have to do – but that money does not go into funding for social programs or defense. Writers concerned about the gutting of government programs, notably among nations in the Global South in the 1980’s and 1990’s, argued that debt payments were going to capsize state programs in the poor nations. These figures look at the spending that occurred after foreign creditors were paid; spending obviously would have been higher without the presence of debt. I provide data on all nations for which there is data, the nations of the Global North separately, and the nations of the Global South separately.
The headline story can be found in the right-hand column. That counts the nations that underwent permanent enduring cuts in spending between 1981 and 2011. In the Global North, no nation saw enduring reductions in non-interest government spending. In just slightly under half of the wealthy nations, spending steadily increased. In just slightly under a third of the wealthy nations, spending as a percentage of the GDP was essentially steady. Every year they spent about the same percentage of the available national income. In five nations, a little under a quarter of the group, there was a period where there were substantial cuts in public expenditure. However, the shrink-the-government movement did not last and spending was soon restored to its original levels. (In Post-Thatcher Britain, spending by 1998 went up to a higher proportion of the economy than had existed before she took office.)
What about the nations in the Global South? These were countries where the International Monetary Fund and the World Bank actually worked to reduce the size of the government in the economy, generally as a component of debt repayment plans.
The table shows that of the nations in the Global South only about one sixth actually reduced their government expenditures below levels observed before the Washington Consensus (a shrink-the-government movement for poor nations that started about 1990.) Those six nations were Bhutan, Brunei, Costa Rica, Madagascar, Pakistan and the Seychelles. In Madagascar, the cuts were fairly minor. Note the only Latin American country on the list is Costa Rica, despite massive concern about neoliberalism among writers writing about Central and South America.
In the majority of poor nations, effective spending steadily increased. In about 10%, spending did not change. In about one sixth of the countries, there were actually significant cuts in spending, but after a short period of austerity, spending bounced back to their previous pre-cut levels. The bouncers include Chile, Equatorial Guinea, Honduras, Indonesia, Panama and Venezuela. In the case of Honduras and Venezuela, spending rebounded to levels higher than those before the imposition of austerity. Panama is a slight exception here, because only a portion of the original cuts were restored.
For North American readers, I will point out that non-interest government spending in the United States has steadily increased, although it reduced somewhat during the Clinton years. Unsurprisingly, there was a giant ratchet in spending in the immediate aftermath of 9-11. Increases have been bipartisan. The two biggest recent jumps occurred in the last year of George W. Bush’s administration and the first year of the Obama administration.
Canadian spending vacillates between 35% and 44% of GDP with yearly fluctuations being essentially random.
For readers in the Global South, spending in most of Latin America has steadily increased. This includes Argentina, Brazil, Colombia and Mexico as well as most of the smaller economies. India has also seen steadily increasing expenditure. Ethiopia, generally considered to be one of the best governments in Africa for promoting economic growth, maintains a steady level of about 20% of GDP.
Generally, the governments of wealthy nations spend a far larger percentage of their GDP on government programs than do poor nations. Belgium for example, a nation with relatively low defense expenditures spent over 50% of its GDP on government programs in 2011. Mexico, a big spender by Global South standards, only spent 23% of its GDP on government programs in 2011. The United States and Canada spent respectively 39% and 42% of their GDPs on government programs.
So, the good news is that government spending, a key prop of economic development and human well-being is still alive and well throughout most of the world. There may have been some shifting in spending priorities. There certainly have been movements to shrink the welfare state. But basically, at least as of 2011, Big Government was still okay.
Will government programs survive the more aggressive assault that has come the rise of neo-populist governments both in the United States and elsewhere? Will government programs survive the fiscal day of reckoning that comes when tax cuts make present levels of expenditure unsustainable?
These are huge and unanswerable questions.
For now, the news is cheerful. On future developments, keep watching.
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For readers who are interested, I include a list of the findings for every nation in the analysis at the end of the article, so readers can look up any country in which they are interested.
For readers interested in the debates about neoliberalism, the Annual Review of Sociology contains thorough, exhaustive and exhausting to read, summaries of sociological debates in general. Miguel Centeno and Joseph Cohen did a review of discussions of neoliberalism in the 2012 edition.
Bob Jessops’ Future of the Capitalist State is a pretty good book length review of the issues as is David Harvey’s Brief History of Neoliberalism. Fine books all, but demanding reading. Bring coffee.
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Non-Interest Government Expenditures as a Percentage of GDP 1981-2011
Nations with STEADY INCREASES IN SPENDING
Iran (Minor Dip in 1990’s)
Nations with CONSISTENT UNCHANGED SPENDING
Sweden (Growth Before 2000)
Saint Vincent and the Grenadines
Nations with TEMPORARY CUTS THAT WERE RESTORED
Belgium (Full Restoration)
Ireland (Full Restoration)
Netherlands (Partial Restoration)
New Zealand (Partial Restoration)
United Kingdom (Greater Expenditure Beyond Restoration)
Chile (Full Restoration)
Equatorial Guinea (Full Restoration)
Honduras (Greater Expenditure Beyond Restoration)
Indonesia (Full Restoration)
Panama (Partial Restoration)
Venezuela (Greater Expenditure Beyond Restoration)
Nations with PERMANENT CUTS IN SPENDING
Madagascar (Minor Cuts)