Chapter

2 Growth of the Government Sector

Author(s):
International Monetary Fund
Published Date:
March 1986
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The sharp increase in the proportion of community output appropriated by the state is among the most outstanding changes in industrial economies during this century. Studies of this phenomenon have revealed a certain historical pattern in which periods of social upheavals, such as two world wars and the depression of the 1930s, were associated with abrupt upward shifts in the public expenditure/GDP ratio. Although the expenditure level generally subsided after the upheavals, it came to rest at a level appreciably above the one prevailing before the disturbance. This pattern has been explained in terms of a displacement effect hypothesis advanced in a study of long-term public expenditure growth in the United Kingdom. 1 In essence, the hypothesis emphasizes the role of social disturbances in changing taxpayers’ perceptions of tolerable tax burdens. Relaxation of these financial stringencies enables governments that are under constant pressure for increased public spending to maintain expenditure after the disturbance at a level substantially above the earlier level. The Peacock-Wiseman study was followed by a number of similar studies in other countries that appeared to lend support to this hypothesis.

Although the severity of the two oil crises in the 1970s and the associated worldwide recession hardly matches that of the social upheavals earlier in the century, the explosive growth of expenditure/GDP ratios in some of the smaller industrial countries during the 1970s and early 1980s falls into a pattern that might conform to the displacement effect hypothesis. However, the role of tax burden perception as a check on expenditure growth evidently lost much of its perceived previous strength, with the result that deficits of an unprecedented magnitude and persistence are now a fairly common fiscal feature. While this line of analysis could prove interesting, it will not be pursued any further, as the focus here is rather on the economic implications of the expansion of the government sector. To set the stage, this chapter accounts for major changes in fiscal aggregates during 1972–82, with emphasis on total change over the period. The time pattern of change in each country is demonstrated in Charts 2, 3, and 4 in this chapter and is discussed in some detail in Part II.

Chart 2.Consolidated Central Government Expenditure

(As a percentage of GDP)
(As a percentage of GDP)

Chart 3.Consolidated Central Government Revenue

(As a percentage of GDP)
(As a percentage of GDP)

Chart 4.Smaller Industrial Countries: Fiscal Balances

(As a percentage of GDP)
(As a percentage of GDP)

Expenditure

Total expenditure of the consolidated central government rose as a proportion of GDP in all countries in the group over the period covered (Table 2.1 and Chart 2). However, the expansion differed markedly among individual countries. From 1972 to 1982, two countries, Ireland and Belgium, experienced the sharpest increase in this ratio, 21 and 17 percentage points, respectively. Sweden and Denmark followed with over a 13 percentage point rise each, and the Netherlands (1973–82) and Spain (1972–81), with increases of 13 and 12 percentage points, respectively. Countries whose expenditure/GDP ratios expanded between 5 and 11 percentage points over this period are New Zealand, Austria, Iceland, and Finland; Luxembourg’s and Australia’s shares rose moderately by less than 4 percentage points. The smallest expansion of the government sector took place in Norway, 2½ percentage points over the ten-year period.

Table 2.1.Total Expenditure as a Percentage of GDP
19721973197419751976197719781979198019811982
Australia24.624.324.529.430.729.630.428.928.128.128.3
Austria30.131.932.335.536.135.938.838.738.639.739.9
Belgium39.839.939.644.846.047.749.550.551.356.256.9
Denmark32.031.034.435.035.236.037.038.140.643.745.2
Finland25.524.525.530.131.132.030.530.029.529.630.6
Iceland30.532.333.835.930.831.931.632.430.931.935.9
Ireland36.737.943.944.345.443.745.247.152.055.057.8
Luxembourg32.129.829.036.736.839.437.838.239.337.935.8
Netherlands46.047.352.452.150.351.352.654.356.758.8
New Zealand31.031.335.040.234.738.540.837.738.540.542.2
Norway39.439.339.140.744.645.445.645.243.141.041.8
Spain20.520.421.122.721.624.926.027.829.032.3
Sweden35.434.236.136.438.741.344.845.746.548.348.9
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Expenditure on goods and services, chiefly wages and salaries, absorbed a declining proportion of budgetary resources over the period in all countries in the group except Iceland where its proportion of total expenditure, as well as its share in GDP, rose substantially2 (Table 2.2). The ratio of expenditure on goods and services to total expenditure is highest in Spain, at 36 percent, and lowest in the Netherlands and Sweden, at 14 percent.

Table 2.2.Expenditure on Goods and Services
19721973197419751976197719781979198019811982
Ratio to GDP
Australia6.25.95.76.16.06.06.15.85.85.96.1
Austria9.18.28.59.69.89.710.110.09.910.210.3
Belgium9.99.89.811.111.011.211.511.411.412.011.7
Denmark10.48.99.79.89.18.88.68.48.79.09.0
Finland5.85.55.46.16.16.06.15.96.06.06.3
Iceland9.39.510.210.210.010.211.011.111.211.412.0
Ireland7.47.48.08.78.58.07.98.49.09.69.6
Luxembourg7.36.96.98.38.08.38.28.38.77.48.1
Netherlands8.08.08.78.58.38.18.48.48.58.5
New Zealand9.59.39.29.48.99.49.99.510.410.710.9
Norway7.67.47.37.67.77.67.57.26.97.47.4
Spain8.99.19.19.59.910.511.210.312.211.6
Sweden7.37.37.37.27.07.17.37.47.47.26.8
Share in Total Expenditure
Australia25.124.123.420.619.520.120.120.020.421.021.7
Austria30.425.826.227.127.127.026.025.825.625.725.9
Belgium24.924.624.824.724.023.423.222.622.221.420.5
Denmark32.528.828.128.125.724.423.322.221.320.720.0
Finland22.722.421.220.219.718.919.919.720.520.220.4
Iceland30.729.330.228.332.432.034.834.136.335.833.4
Ireland20.119.518.219.618.718.217.517.817.317.516.6
Luxembourg22.723.723.722.721.721.121.821.722.119.622.6
Netherlands17.416.916.716.316.415.915.915.414.914.5
New Zealand30.829.826.223.325.524.524.225.227.126.525.8
Norway19.218.818.818.717.316.816.516.016.018.017.6
Spain43.344.843.042.045.642.142.837.242.135.9
Sweden20.821.220.119.818.217.216.316.215.814.914.0
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

A comparison of individual categories of expenditure with total expenditure and changes in ratios over time is of limited explanatory value, however, as it essentially reflects different relative sizes of the government sector in the various countries and changes in other expenditure categories in each country. A sounder basis for comparison is GDP, which is also shown in Table 2.2. This criterion reveals greater similarity and a more stable pattern of change. Spain, Belgium, and Iceland have the highest ratios at about 12 percent, while Australia and Finland exhibit the lowest ratios at around 6 percent. In all countries except Denmark and, to a lesser extent, Norway, Australia, and Sweden, the ratio of expenditure on goods and services to GDP increased over the period; the largest increases were registered in Spain, Ireland, and Iceland, with between 2 and 3 percentage points each. To a certain extent these percentages show an increased government absorption of labor in line with official employment policies, although not in every case. Measures to stimulate employment frequently took other forms, such as increased capital expenditure and lending operations; or, they were carried out in the same form, but by other public entities, such as local governments, as in Denmark and Sweden; in Austria, the nationalized industries received increased central government transfers to compensate for higher costs of creating additional employment.

Interest payments on government debt rose as a proportion of both total expenditure and GDP in all countries (Table 2.3) except Luxembourg, where the government finances registered surpluses for most of the period; and Spain, where continuous surpluses in the 1960s partially absorbed persistent fiscal deficits over the period covered, as did an erosion of outstanding debt brought about by inflation. In five countries—Belgium, Denmark, Ireland, New Zealand, and Sweden—interest payments absorbed a substantial proportion of budgetary resources—between 10 percent and 16 percent of total government expenditure based on 1982 figures; evidence shows that these ratios will increase markedly in the next few years. Interest payments rose abruptly over the period in these countries, although in 1972 the ratios were already quite high in Ireland and New Zealand, at 9½ percent and 7½ percent, respectively. The interest payment ratios are the highest for Belgium and Ireland, at 7½–9 percent of GDP; in the middle range are Denmark, New Zealand, and Sweden, with ratios in the 4–5 percent range. At the lower end are Finland, Luxembourg, and Spain, with ratios of less than 1 percent.

Table 2.3.Interest Payments
19721973197419751976197719781979198019811982
Ratio to GDP
Australia1.61.61.41.41.31.71.81.91.91.91.9
Austria0.60.60.60.81.11.31.61.71.82.02.2
Belgium2.62.62.72.72.93.23.64.15.06.77.7
Denmark0.40.50.50.50.71.11.32.32.73.84.6
Finland0.50.40.30.30.20.30.40.60.60.70.9
Iceland0.81.01.12.01.61.72.22.41.82.02.4
Ireland3.53.63.74.35.05.25.76.16.57.59.1
Luxembourg1.00.80.70.70.70.70.80.80.70.70.7
Netherlands1.31.31.31.51.51.61.72.02.53.2
New Zealand2.32.22.22.32.63.03.43.63.64.14.6
Norway1.01.01.10.91.61.92.22.62.72.62.4
Spain0.50.50.40.40.30.40.50.50.50.6
Sweden1.01.11.11.31.31.51.82.02.94.34.6
Share in Total Expenditure
Australia6.66.45.64.94.35.76.06.76.86.96.8
Austria2.11.91.92.23.13.64.14.34.64.95.6
Belgium6.66.66.96.16.26.77.28.19.811.913.5
Denmark1.31.51.41.51.93.13.46.16.68.610.1
Finland1.91.71.10.80.81.11.41.92.12.42.9
Iceland2.63.13.25.65.05.26.97.45.76.26.6
Ireland9.59.48.59.711.012.012.612.912.613.615.7
Luxembourg3.12.82.41.91.81.92.12.01.91.92.0
Netherlands2.82.72.52.82.93.13.23.74.45.4
New Zealand7.67.06.25.77.57.88.39.59.510.110.9
Norway2.52.52.82.33.64.14.85.76.46.35.8
Spain2.32.72.01.71.61.61.71.81.91.7
Sweden2.93.13.13.73.33.74.04.46.39.09.5
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

The mounting budgetary burden of interest payments in most countries in the group was mainly caused by large and widening fiscal deficits. Rising interest rates over the period also contributed, and other factors tended to increase the debt-servicing burden. Among these was the growing size of the external component of government debt, which was protected against the erosion of domestic inflation in the long run and could have added to the budgetary burden in high inflation countries like Iceland, Ireland, and New Zealand where fiscal deficits were increasingly financed by external sources. Also, in a number of countries, interest rates were determined, for balance of payments reasons, with regard to international rates rather than to domestic market conditions, which tended to put upward pressure on interest rates over the period. However, where financial markets were not well developed and inflation was only partially reflected in interest rates, inflation eroded the stock of outstanding debt in real terms and lessened the budgetary burden of interest payments. Indexation of financial assets, as practiced in Finland in the early part of the period and in Iceland over the whole period, reduced this erosion—but only partially, as not all financial assets were indexed.

Subsidies and other current transfers form the largest expenditure category in all countries in the group. The category includes such items as social security benefits and aid to ailing industries—both of which played a major role in efforts to cushion the recessionary impact—and transfers to other levels of government and to public enterprises. By the end of the period, this category accounted for one half to two thirds of total expenditure in all countries except Spain and Iceland where the ratios were 42 percent and 37 percent, respectively (Table 2.4). Generally, this category increased faster than total expenditure, thus implying a still faster growth in its ratio to GDP. The largest increases in this ratio occurred in Sweden, Ireland, the Netherlands, Denmark, and Belgium; the smallest increases took place in Iceland, Norway, Luxembourg, and Finland. Not unexpectedly, this significant expenditure category was a major determinant of the total expansion of the government sector. A comparison of the relative increases in total expenditure and in subsidies and other current transfers in relation to GDP reveals that in five countries, between 70 percent and 90 percent of the total expansion is accounted for by this category; and in four countries—Australia, Finland, Luxembourg, and Sweden—the category accounts for more than the total expansion, implying that the share of other expenditure categories taken as a whole shrank over the period.

Table 2.4.Subsidies and Other Current Transfers
19721973197419751976197719781979198019811982
Ratio to GDP
Australia11.712.112.314.517.317.418.518.217.817.817.9
Austria16.817.918.820.821.221.423.323.122.823.323.5
Belgium22.323.123.026.827.728.829.630.429.631.931.6
Denmark18.719.321.722.022.623.824.925.427.028.428.9
Finland13.913.514.717.418.419.018.919.018.118.719.5
Iceland12.111.212.813.010.210.211.012.311.511.713.2
Ireland18.819.021.324.124.423.424.325.027.428.530.6
Luxembourg18.917.116.722.622.824.823.823.824.724.622.8
Netherlands30.432.936.436.936.137.437.938.239.241.1
New Zealand13.414.215.518.116.018.520.519.419.620.822.3
Norway24.424.424.325.026.627.228.528.026.025.626.5
Spain7.27.47.78.38.09.411.213.312.313.6
Sweden17.818.220.120.923.325.828.530.130.031.232.3
Share in Total Expenditure
Australia47.649.850.249.156.258.761.062.863.463.263.2
Austria55.756.258.058.658.659.660.059.759.158.758.9
Belgium56.058.057.959.960.160.559.760.157.756.755.6
Denmark58.362.263.162.964.266.367.366.766.764.964.0
Finland54.655.157.857.759.359.562.263.561.563.163.8
Iceland39.734.637.736.133.232.134.837.937.136.636.9
Ireland51.250.148.454.353.753.553.653.252.851.852.9
Luxembourg58.957.557.661.461.963.163.062.462.864.863.7
Netherlands66.169.569.570.971.772.972.070.469.169.9
New Zealand43.245.344.244.946.048.150.351.551.051.352.9
Norway61.962.262.261.459.659.862.461.960.462.463.4
Spain35.336.336.336.437.037.642.947.842.641.9
Sweden50.253.255.657.560.162.463.765.864.564.666.0
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

As discussed further in the following two chapters, the abrupt relative increase in subsidies and other current transfers in most countries in the group stems in part from endeavors to mitigate the adverse impact of the recession on living standards and on employment and activity in the sectors hardest hit. The types of expenditure involved are mainly social security benefits, industrial assistance, and, in some cases, transfers to other levels of government and to public enterprises.

As far as social security expenditure is concerned, measures commonly taken over the period include adjustments for inflation or wage increases, often through automatic mechanisms, increases in real benefits and extension of their coverage, and, in some instances, relaxation of qualifying criteria, such as a reduction of the retirement age in Belgium, Denmark, Luxembourg, and Sweden; the introduction of a flexible retirement option in Sweden; and more generous disability schemes in the Netherlands. Demographic factors also contributed to the increase in social security outlays in some countries; the most notable cases are the aging structure of the population, for example, in Belgium, the Netherlands, and Sweden; a rising female participation rate in Denmark and New Zealand; and a reversal of net emigration patterns in Ireland and of migratory flows of the labor force in Spain. A reverse migratory pattern took place in a host country like Luxembourg. Unemployment compensations rose markedly in most countries, and the recessionary conditions also reduced social security contributions from both employers and employees, which in some countries necessitated increased central government grants. In countries with close government involvement in income determination, increases in various social security benefits were often decided in the context of incomes policy.

Most countries in the group engaged in some form of industrial support to aid industries hardest hit by the recession and by structural changes brought about by changed relative prices, cost structures, and demand patterns. In Norway the rapid development of the oil sector accentuated the need for structural adjustment. Generally, the measures taken were selective, depending on the particular circumstances in each case, and were directed at such objectives as the transfer of resources to the export- or import-competing sectors (Denmark, New Zealand, and Sweden) and the preservation of regional balance in terms of employment opportunities (Austria, Finland, and Norway). Only a part of this assistance is reflected in this expenditure category, however, as other measures such as tax incentives and loan finance were frequently involved.

In some countries, a prominent item under this category is transfers to other levels of government and to public enterprises. Increased transfers to other levels of government sometimes stemmed from obligations assumed by the authorities in carrying out tasks in line with official employment policies, as was the case in Denmark and Sweden; in other countries, such as Australia and Spain, growing transfers reflected official policy to enhance the role of local governments. Similarly, increased transfers to public enterprises in countries such as Austria and Spain were partly the result of the role imposed on the enterprises in pursuing employment and anti-inflation policies, respectively.

Capital expenditure and net lending, taken together, are the expenditure categories most directly involved in policies to stimulate employment and activity; at the same time, they were the type of expenditure most easily reduced when the stance of fiscal policy shifted toward a restrictive direction. For this reason and also because of the nature of expenditure involved, the time pattern of change over the period was rather irregular. By the end of the period, Iceland, Spain, Ireland, Norway, and Finland had devoted relatively the largest portion of budgetary resources to capital expenditure and net lending, ranging from 13 percent in Finland to 23 percent in Iceland (Table 2.5). Ireland and Iceland had the highest ratios to GDP, about 8½ percent each. By contrast, Denmark and Australia had the lowest ratios to total expenditure (6 percent and 8½ percent, respectively), and also the lowest ratios to GDP (2½ percent each). The highest ratios reflect heavy central government involvement in the provision of infrastructure (Luxembourg, Ireland), or a large role played by the government in financial intermediation (Iceland, Norway, Spain). In most countries the ratio of capital expenditure and net lending to GDP declined over the period or remained approximately constant. In three countries, however, this ratio expanded: by 1 percentage point in Belgium, by 1½ percentage points in Ireland, and by almost 3½ percentage points in Spain. As already indicated, this comparison between end-years conceals significant changes within the period, as may be seen in Table 2.5.

Table 2.5.Capital Expenditure and Net Lending
19721973197419751976197719781979198019811982
Ratio to GDP
Australia5.14.85.17.56.14.63.93.02.62.52.3
Austria3.65.14.54.34.03.53.84.04.14.23.8
Belgium5.04.34.14.24.44.54.94.65.25.65.9
Denmark2.52.42.52.62.92.22.21.92.12.52.7
Finland5.35.15.16.46.36.65.04.44.74.24.4
Iceland8.210.69.810.89.09.87.46.76.56.88.3
Ireland7.08.010.97.37.67.17.47.69.09.48.5
Luxembourg4.94.94.85.15.35.55.05.35.95.74.5
Netherlands6.35.15.95.24.54.24.75.76.66.0
New Zealand5.75.68.210.57.37.57.15.24.84.94.4
Norway6.56.56.47.18.78.87.47.47.45.55.2
Spain3.83.44.04.83.45.34.44.44.87.1
Sweden9.27.77.66.97.16.97.26.26.25.65.2
Share in Total Expenditure
Australia20.719.720.825.520.015.412.910.69.38.88.3
Austria11.816.113.812.111.29.99.910.210.710.69.6
Belgium12.610.910.49.49.69.39.99.210.210.010.4
Denmark7.97.67.47.58.16.26.05.15.35.75.9
Finland20.820.819.921.320.320.616.514.816.014.313.0
Iceland27.033.028.930.129.330.723.520.520.921.423.1
Ireland19.121.024.816.416.616.316.316.117.317.114.7
Luxembourg15.416.616.413.914.513.913.213.914.915.112.7
Netherlands13.710.811.39.98.98.28.910.511.610.2
New Zealand18.517.923.426.021.019.617.313.812.412.110.5
Norway16.416.516.317.619.519.316.316.417.313.313.2
Spain18.416.618.821.015.721.216.815.716.522.0
Sweden26.122.521.219.018.416.816.113.613.311.510.6
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Revenue

Total revenue and grants, expressed as a ratio to GDP, increased in all countries in the group over the period (Table 2.6 and Chart 3). While the rate of increase differed markedly among individual countries, it was much more evenly spread than the rate of growth of expenditure. The largest increases were experienced in Belgium and Ireland, at 9½ and 11½ percentage points, respectively, followed by Sweden and New Zealand, at about 7 percentage points each. The lowest rate of growth occurred in Luxembourg, at just over 1 percentage point; Finland and Denmark were the next lowest, each with about 2 percentage points, A comparison of rates of growth of revenue and expenditure reveals that in all countries except Norway expenditure grew faster and, in a few cases, substantially faster than revenue. In Norway revenue grew faster than expenditure between 1972 and 1982 because of rapidly growing oil revenue. Here again, it should be noted that a comparison of end-year ratios in some instances conceals important changes within the period; these are discussed in some detail in Part II of the study. Countries that experienced the greatest disparity in revenue and expenditure growth were Denmark, Ireland, Belgium, the Netherlands, and Sweden, where the difference in terms of ratios to GDP ranged between 6½ and 11 percentage points. This disparity implies a sharp deterioration in the fiscal position in these countries—an aspect that is examined further in the following section.

Table 2.6.Total Revenue as a Percentage of GDP
19721973197419751976197719781979198019811982
Australia24.322.624.025.425.726.326.725.626.327.328.0
Austria29.930.330.831.531.532.234.735.035.336.835.5
Belgium35.436.537.440.140.441.742.742.943.643.944.7
Denmark34.634.535.033.034.934.736.737.437.837.536.9
Finland26.727.326.327.931.030.528.627.427.528.628.6
Iceland27.929.229.229.728.327.429.030.229.631.132.9
Ireland31.131.132.031.935.334.333.835.038.640.042.6
Luxembourg33.532.332.937.737.139.940.638.040.037.634.7
Netherlands46.047.349.649.848.448.448.649.950.551.3
New Zealand27.228.830.930.030.433.432.332.432.233.334.8
Norway37.938.437.837.538.738.638.838.941.343.142.6
Spain20.020.219.921.020.722.723.724.324.725.3
Sweden34.132.832.833.738.339.639.538.137.838.939.0
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Income taxes at the central level differ significantly in relative importance among individual countries. Their weight in total revenue is largest in New Zealand and Australia, at 66½ percent and 63½ percent, respectively (Table 2.7). This tax is also highest in relation to GDP in these countries—23 percent in New Zealand and 18 percent in Australia. The high ratios are explained in part by the absence of social security contributions in both countries and the consequent financing of social security expenditure by general taxation. Income tax at the central level is lowest in Iceland and Sweden—11 percent and 15½ percent, respectively, of total revenue and 3½ percent and 6 percent, respectively, of GDP.3 On the whole, personal income tax is the main source of revenue in this category, except in Norway, where, because of the oil industry, the corporate income tax is the most important. In 9 out of the 13 countries revenue from the income tax grew faster than GDP; the highest rates of growth, as a ratio to GDP, were in New Zealand and Belgium, at 6½ percentage points; and in Ireland and Norway, between 4 and 4½ percentage points. This increase occurred despite a series of reductions over the period as the progressivity of rates secured a still faster growth of revenue yield. However, tax cuts reduced tax elasticities with respect to income to such an extent in Sweden, Iceland, Denmark, and the Netherlands that the ratio fell to a range of 3.1–0.9 percentage points.

Table 2.7.Income Taxes
19721973197419751976197719781979198019811982
Ratio to GDP
Australia14.113.314.616.416.316.817.015.516.016.917.8
Austria6.16.06.66.46.26.47.47.37.37.57.1
Belgium11.012.012.914.814.515.616.517.016.716.517.6
Denmark13.614.415.913.413.012.212.712.512.712.712.4
Finland7.98.48.89.111.09.87.77.07.78.68.1
Iceland4.85.03.62.62.62.22.83.73.23.33.6
Ireland8.79.09.39.510.610.710.711.212.713.213.2
Luxembourg11.411.913.514.013.615.816.714.614.313.112.1
Netherlands14.915.315.915.515.014.714.714.814.214.0
New Zealand16.718.621.119.720.122.620.921.221.722.223.1
Norway8.26.16.56.26.76.87.08.011.212.311.6
Spain3.23.33.43.84.24.34.95.35.95.2
Sweden9.17.47.17.29.69.37.47.06.86.26.0
Share in Total Revenue and Grants
Australia57.958.661.164.563.163.663.660.660.862.063.5
Austria20.419.821.420.419.619.821.220.720.620.520.0
Belgium31.233.034.636.835.837.338.839.638.237.639.4
Denmark39.341.645.440.637.235.234.633.433.533.733.8
Finland29.430.933.432.735.432.127.025.528.030.028.5
Iceland17.317.212.28.89.38.09.812.310.710.611.1
Ireland28.129.029.129.730.131.131.632.132.832.931.0
Luxembourg33.936.740.837.236.639.541.138.535.734.934.9
Netherlands32.332.332.131.131.030.330.329.728.227.4
New Zealand61.264.568.465.666.067.664.765.467.366.866.5
Norway21.716.017.216.517.317.618.020.627.228.527.1
Spain15.816.417.318.120.118.820.821.923.920.5
Sweden26.822.721.621.425.123.518.718.318.115.915.5
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Most countries in the group introduced measures over the period to reduce the personal income tax, although the extent of cuts varied according to, inter alia, the rate of inflation. The stated objectives included a reduction or elimination of fiscal drag, which, although in some cases had begun on an ad hoc basis, tended to turn into regular adjustments and, for most countries in the group, ended up as an automatic or a semi-automatic indexation mechanism. In some countries, such as Austria, Denmark, Finland, the Netherlands, Norway, and Sweden, reduction of the tax burden was a stated policy aim, either to reduce disincentives, stimulate private sector demand, or, in certain instances, redistribute income in favor of lower income groups (Spain, Norway). As indicated earlier, a number of countries in the group reduced the personal income tax with the aim of moderating wage settlements.

The corporate income tax was also reduced in several countries to stimulate investment, employment, and activity in the private sector. The measures commonly took the form of rate reductions and increased or accelerated depreciation allowances; and at least in two countries (Denmark and Iceland) depreciation allowances and other deductions were price indexed for corporate income tax purposes.

Social security contributions range from 0 to 47 percent of total revenue in the smaller industrial countries (Table 2.8). These contributions were highest in Spain, at 47 percent, and nonexistent in Australia and New Zealand. In four other countries, the Netherlands, Austria, Sweden, and Belgium, social security contributions range between 30 percent and 40 percent of total revenue, while in Denmark and Iceland they account for only about 3½ percent and 2½ percent of the total; Iceland has no such taxes on employees. In relation to GDP, social security contributions are highest in the Netherlands, at almost 20 percent, followed by Sweden, Belgium, and Austria, at about 13 percent each. The fastest increase in relation to GDP over the 1972–82 period took place in Sweden—some 6 percentage points—followed by Austria—about 3½ percentage points—while Iceland was the only country in which this ratio fell appreciably, by ½ of 1 percentage point, over the period.

Table 2.8.Social Security Contributions
19721973197419751976197719781979198019811982
Ratio to GDP
Australia
Austria9.09.29.510.310.410.812.212.212.512.912.6
Belgium11.411.711.913.013.013.213.113.113.213.513.4
Denmark1.70.60.60.50.50.60.60.70.81.01.3
Finland2.12.42.22.63.02.92.52.72.62.72.8
Iceland1.31.01.01.20.81.11.21.41.30.80.8
Ireland2.83.03.74.44.74.54.44.54.95.15.7
Luxembourg9.38.68.810.911.211.611.110.610.49.78.7
Netherlands16.817.918.417.917.017.317.818.218.819.9
New Zealand
Norway7.510.410.210.29.99.910.09.99.19.49.5
Spain7.78.08.29.38.910.711.311.711.611.9
Sweden7.37.27.79.010.211.012.212.312.413.513.2
Share in Total Revenue and Grants
Australia
Austria29.930.430.932.733.033.735.134.835.235.035.4
Belgium32.232.131.832.332.231.530.630.630.430.729.9
Denmark5.01.61.61.71.61.71.61.82.22.63.4
Finland7.78.78.59.49.69.48.99.89.69.59.6
Iceland4.83.53.54.03.03.84.34.54.22.72.3
Ireland8.99.611.513.613.213.212.912.912.812.713.3
Luxembourg27.726.626.829.030.329.227.528.026.025.825.2
Netherlands36.537.837.136.035.235.836.736.437.338.7
New Zealand
Norway19.827.226.927.225.525.625.725.522.121.822.3
Spain38.839.741.244.543.047.447.948.247.047.2
Sweden21.522.123.826.726.627.830.932.332.834.733.7
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

In countries where the relevant social security schemes were self-financing in nature, the rapid growth of expenditure pulled up contribution rates and, in some instances, necessitated special transfers to the social security system from the central budget. As the period progressed, however, and higher rates imposed a mounting burden on labor costs, an increasing number of countries implemented a series of reductions in contribution rates. The declared objectives were to stimulate activity and employment in the private sector, and in countries like Norway rates were differentiated by regions to promote regional employment policy. In Finland and Norway cuts in contribution rates were at times associated with incomes policy, and in Spain—a country with a serious unemployment problem—the Government committed itself toward the end of the period to reversing the trend of a constantly increasing burden of social security contributions on labor costs. In Sweden where these contributions have grown fastest and are among the highest in terms of ratios to GDP, an increasing proportion has been borne by employers, with the result that the overall ratio of contributions to the total payroll was about 35 percent at the end of the period.

Taxes on goods and services are for a large part value-added or sales taxes and various excise duties and levies. They range between 18 and 48 percent of total revenue and grants, with Spain having the lowest ratio and Finland and Iceland the highest (Table 2.9). In most countries this ratio declined over the period, although it increased in Australia, Denmark, Finland, and Iceland. In Australia the rise was due to a levy on domestic crude oil that was gradually equated with import prices. In the other three countries, value-added or sales taxes were raised to curb private sector demand and to compensate for revenue losses resulting from cuts in the income tax. In terms of GDP ratios, this tax category rose or remained constant in most countries in the group; the largest increases were in Iceland (6 percent) and Denmark (2 percent). In two countries, the ratio declined over the period; in Norway, by 1½ percentage points, and in the Netherlands, by less than 1 percentage point.

Table 2.9.Taxes on Goods and Services
19721973197419751976197719781979198019811982
Ratio to GDP
Australia5.35.05.24.85.35.15.25.76.26.36.1
Austria8.38.98.68.58.78.78.99.08.89.18.9
Belgium10.210.09.99.810.310.310.49.910.710.710.7
Denmark14.314.313.413.214.315.316.316.916.716.616.1
Finland12.512.111.111.411.912.813.413.413.313.513.6
Iceland9.69.411.813.813.613.113.013.113.914.815.5
Ireland10.110.39.99.510.610.310.19.39.69.510.9
Luxembourg7.06.65.87.56.96.96.96.57.67.37.1
Netherlands10.29.610.010.110.310.49.910.09.69.4
New Zealand5.45.25.15.95.55.86.15.95.86.26.7
Norway17.516.815.916.317.117.817.216.316.216.316.1
Spain4.74.73.83.73.33.03.33.34.14.6
Sweden11.511.310.810.110.510.911.411.311.011.511.5
Share in Total Revenue and Grants
Australia21.721.921.519.120.519.519.522.323.423.022.0
Austria27.929.528.127.027.726.925.625.725.024.825.0
Belgium28.727.526.524.425.424.624.523.224.524.423.9
Denmark41.441.538.240.041.144.244.345.444.244.343.6
Finland46.844.442.340.838.342.146.748.948.247.247.6
Iceland34.332.040.346.448.147.944.843.246.947.547.1
Ireland32.533.031.129.930.130.029.826.624.823.925.6
Luxembourg21.020.417.519.818.617.317.117.218.919.520.3
Netherlands22.220.420.120.421.321.520.520.119.018.3
New Zealand19.918.216.619.518.117.418.818.118.018.519.2
Norway46.143.842.143.544.246.144.341.939.337.937.7
Spain23.323.519.317.815.813.313.813.416.718.1
Sweden33.834.532.829.927.527.528.829.829.029.629.4
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Other tax and nontax revenue and grants include payroll taxes, property taxes, taxes on international trade, other taxes, and nontax revenue and grants. This heterogeneous category accounts for 7–39 percent of total revenue and grants (Table 2.10). It is lowest in Belgium and highest in Iceland, where taxes on foreign trade are a significant, albeit declining, revenue source. Expressed as a ratio to GDP, the category ranges between 3 percent in Belgium and 13 percent in Iceland. On the whole, this ratio rose slightly or remained constant for most countries over the period; the most notable exception was the Netherlands, where because of vastly increased revenue from the sale of natural gas, it increased by almost 4 percentage points. Because of their membership in or agreements with the European Communities (EC) or the European Free Trade Association (EFTA), most countries in the group experienced a relative decline in taxes on international trade in relation to GDP over the period. Only in Australia and New Zealand, which are not members of either organization, did this ratio remain roughly constant.

Table 2.10.Other Tax and Nontax Revenue and Grants
19721973197419751976197719781979198019811982
Ratio to GDP
Australia4.94.44.24.24.24.44.54.44.24.14.1
Austria6.56.26.16.36.26.36.36.66.87.27.0
Belgium2.82.72.72.62.72.72.62.93.03.23.0
Denmark4.95.35.25.97.06.67.27.37.67.37.1
Finland4.34.44.24.75.25.05.04.33.93.84.1
Iceland12.213.812.812.111.211.111.912.111.312.213.0
Ireland9.58.89.18.59.38.88.79.911.412.212.8
Luxembourg5.85.34.95.35.35.65.86.27.87.56.8
Netherlands4.14.55.36.36.16.06.16.97.88.0
New Zealand5.15.04.64.54.85.05.35.34.84.95.0
Norway4.75.05.24.85.14.14.74.74.75.15.5
Spain4.44.14.44.14.44.74.14.03.13.6
Sweden6.16.87.27.48.08.48.57.57.67.78.4
Share in Total Revenue and Grants
Australia20.319.417.416.416.316.917.017.015.815.014.6
Austria21.920.319.719.919.719.518.118.919.119.719.7
Belgium7.97.57.26.56.66.66.16.67.07.46.8
Denmark14.315.314.917.820.118.919.519.520.119.419.2
Finland16.116.015.817.016.716.517.415.814.313.414.3
Iceland43.647.344.040.739.740.341.140.038.139.239.5
Ireland30.528.428.326.726.525.625.728.429.630.530.0
Luxembourg17.416.314.914.114.414.014.316.319.519.819.5
Netherlands9.09.510.712.612.612.512.513.815.515.7
New Zealand18.817.315.014.915.915.016.516.514.814.714.3
Norway12.413.013.812.813.010.712.012.011.511.912.9
Spain22.120.422.219.621.120.617.516.512.414.2
Sweden17.920.721.922.020.821.221.619.620.119.821.4
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

Fiscal Balance, Financing, and Debt Accumulation

The period covered witnessed persistent and in most instances widening fiscal deficits (Table 2.11). Of the 13 countries, 8 incurred a deficit in every year of the period; another 3 experienced a deficit in every year after 1974; one country, Norway, realized its only surpluses in 1981 and 1982; only in Luxembourg was there a positive balance in central government finances over the period as a whole—surpluses in 1972–78 and in 1980 and 1982 but deficits in 1979 and 1981. The time pattern of the fiscal balance is demonstrated in Chart 4, which reveals a sharp deterioration in fiscal positions in the period 1974–75 as a result of an expansionary policy response to the recession in the wake of the first oil price shock. A partial recovery followed in 1976 and 1977, when growing internal and external imbalances, especially accelerating rates of inflation and widening current external deficits, induced governments to shift the stance of fiscal policy in a restrictive direction. Belgium and, to a lesser extent, Norway, where deficits continued to widen, are notable exceptions. After 1977, the results were mixed, but in 1979 and 1980, the years of the second oil crisis,. most countries experienced a renewed increase in deficits that in some cases continued over the rest of the period. However, in two countries, Australia and Norway, the 1980–82 period witnessed an improvement in fiscal positions, especially in Norway where oil revenue soared.

Table 2.11.Deficit/Surplus as a Percentage of GDP
19721973197419751976197719781979198019811982
Australia–0.3–1.7–0.5–4.0–5.0–3.3–3.7–3.3–1.8–0.8–0.3
Austria–0.2–1.6–1.5–4.0–4.6–3.7–4.0–3.7–3.2–2.9–4.4
Belgium–4.3–3.5–2.2–4.7–5.6–5.9–6.9–7.6–7.7–12.3–12.2
Denmark2.63.50.7–1.9–0.4–1.3–0.3–0.7–2.7–6.2–8.3
Finland1.22.90.8–2.3–1.5–1.9–2.6–2.0–1.0–2.0
Iceland–2.6–3.1–4.6–6.2–2.5–4.4–2.6–2.2–1.4–0.8–2.9
Ireland–5.6–6.8–11.9–12.4–10.2–9.5–11.5–12.1–13.3–15.0–15.2
Luxembourg1.42.53.91.00.30.62.7–0.21.0–1.60.5
Netherlands–3.0–2.6–3.0–3.1–4.6–4.6–6.5–7.6
New Zealand–3.8–2.5–4.1–10.2–4.4–5.1–8.6–5.3–6.3–7.2–7.4
Norway–1.5–0.9–1.4–3.2–5.9–6.9–6.8–6.3–1.82.10.8
Spain–0.5–0.3–1.2–1.8–0.9–2.2–2.4–3.5–4.3–7.1
Sweden–1.3–1.5–3.3–2.7–0.4–1.7–5.2–7.6–8.7–9.4–9.9
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.
Source: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984.

The countries that experienced the sharpest deterioration in their government finances relied increasingly on foreign financing of the deficits; a number of these countries had recourse, in growing measure, to domestic monetary financing to meet the borrowing requirement. These developments are discussed in some detail under individual country sections in Part II.

As a consequence of mounting fiscal deficits, government indebtedness increased in most of the smaller industrial countries over the period (Table 2.12). Expressed as a ratio to GDP, government debt in 1982 was the highest in Ireland, at 109 percent. Other countries recording high government debt were Belgium (74 percent), and Denmark and New Zealand (almost 60 percent each). There is evidence that these ratios have since expanded. By contrast, Finland’s government debt was a moderate 12½ percent of GDP in 1982, and in Luxembourg, it was negligible. The rate of debt accumulation by the central government was most rapid in Denmark and Ireland, at 61 and 56 percentage points, respectively; the rate of expansion in Belgium and Sweden was also high, at approximately 30 percentage points each. In Australia, on the other hand, the ratio of government debt to GDP declined by 12 percentage points from 1973 to 1982. As already indicated, the external component of government debt grew over the period in most countries in the group. The fastest relative increase occurred in the same countries that had experienced the fastest expansion of total debt, with the addition of New Zealand and Finland whose external component grew at an unusually fast rate toward the end of the period. The external component was relatively largest in Finland and Iceland, at 62 percent and 66 percent, respectively, of total government debt, followed by New Zealand and Ireland, at 40 percent each; in contrast, the Netherlands and Luxembourg had no or negligible foreign debt at the central government level.

Table 2.12.Central Government Outstanding Debt
19721973197419751976197719781979198019811982
Ratio to GDP
Australia34.829.828.827.928.029.830.428.624.922.7
Austria10.510.410.015.318.520.823.625.226.328.030.0
Belgium45.042.539.040.040.343.246.249.754.865.273.9
Denmark–1.6–3.6–1.74.58.413.218.224.733.745.959.2
Finland6.64.53.03.53.95.28.59.19.310.112.3
Iceland15.812.513.418.118.920.722.423.926.423.631.4
Ireland52.359.765.073.479.277.982.189.591.499.3108.7
Luxembourg8.98.57.67.36.75.75.15.04.7
Netherlands22.121.022.122.422.523.825.729.133.539.4
New Zealand44.641.241.847.844.748.750.549.247.649.258.2
Norway28.126.824.825.727.833.138.442.137.032.126.5
Spain15.613.211.812.113.015.314.315.417.219.4
Sweden16.616.718.318.917.018.321.325.732.338.845.4
Foreign Debt as a Percentage of Total Debt
Australia8.66.76.76.58.013.516.916.514.215.9
Austria20.416.022.031.926.128.730.127.527.832.031.7
Belgium1.71.10.80.80.60.51.43.98.115.820.9
Denmark
Finland39.543.742.444.348.654.860.258.957.560.362.2
Iceland66.665.470.261.961.364.669.162.758.154.765.7
Ireland8.910.315.920.728.824.620.623.628.037.241.2
Luxembourg8.27.86.65.64.84.33.52.21.2
Netherlands0.10.1
New Zealand16.012.420.426.229.032.633.034.436.438.541.4
Norway5.94.33.714.620.526.334.132.028.425.022.5
Spain5.44.85.14.77.314.38.97.14.64.9
Sweden0.10.20.37.813.413.320.121.922.9
Sources: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984; national sources; and Fund staff estimates.
Sources: International Monetary Fund, Government Finance Statistics Yearbook, 1983 and 1984; national sources; and Fund staff estimates.

Alan T. Peacock and Jack Wiseman, The Growth of Public Expenditure in the United Kingdom (Princeton: Princeton University Press, 1961), pp. 24–30.

The increase resulted in part from a change in definition.

In both countries, and especially in Sweden, the income tax is a major revenue source at the local government level.

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