Chapter

I Introduction and Some Conclusions1

Author(s):
Peter Heller, and Alan Tait
Published Date:
April 1982
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Many studies on international tax comparisons have been undertaken since the early 1970s.2 While controversial, such studies have facilitated more subtle comparisons of a country’s tax performance than would be afforded by focusing on its simple tax ratio. This paper provides a comparable framework for comparisons of both functional and economic expenditure patterns of countries having similar economic and demographic positions. It also provides an implicit technological norm for predicting the economic characteristics of a country’s expenditure pattern, based on its choice of priorities for functional expenditures.

For example, Table 1 shows the international expenditure comparison index for comparing the functional categories of government expenditure. Use of this index allows us to conclude, tentatively, that the French Government spends a little more than might be expected on education (9 per cent more) but perhaps 20 per cent more than expected on health and social security, whereas the Egyptian Government spends twice as much as expected on education, the United Kingdom 50 per cent more than expected, but Greece 30 per cent less. An alternative way to look at government expenditure is to divide it into the so-called economic categories; Table 2 shows the indices for the economic classification of expenditures. This table indicates that the Government of Mali spends some 79 per cent more than might be expected on government wages and salaries and Greece spends twice as much as expected, while Korea spends 55 per cent less than predicted.

Table 1.International Expenditure Comparison Index, 1977: Functional Categories of Expenditure1
CountryYear

of

Data
General

Public

Service
DefenseEducationHealthSocial

Security

and

Welfare
Health,

Social

Security, and

Welfare
Housing

and

Community

Amenities
Agriculture,

Forestry,

and

Fisheries
Mining,

Manufacturing,

and

Construction
Electricity,

Natural

Gas, and

Water
Transportation

and

Communications
Argentina1977400112341357453116400118109
Australia296711301116985386372
Austria1977142506810095971305974400*142
Bahamas197510991051203481840
Bahrain197711916
Bangladesh1977421249106345939392293
Barbados19771136139896381185171135145
Belgium19776471132871191116829138400*171
Bolivia19778282786714354022185478
Botswana19771214816315012112279136126
Burma197779225625739452151382878
Burundi197771145122211113107
Cameroon197618083786325012916620445126
Canada215568109126113119117126231
Chad1977974001094319321812512244
Chile197715174105115228183121642963
Costa Rica197759249843210135303535152
Cyprus19771421456164676221879165533
Denmark1976116786610499985012789400*34
Dominican Rep.197771364693127106278961998352
Ecuador1977629885637347526
Egypt19776768211107187163342132199147
ElSalvador19777725839396937965125113
Ethiopia197760828012522513821852748151
Fiji19771601711414630615482114838379
Finland1977777812412176907023117042127
France1977777510912111912093451353719
Gambia, The1977200992114911948225119
Germany, Fed. Rep.26411492118971018951188
Ghana1977761329475879553393
Greece19778332571698382641214619103
Grenada19772913910518934874395386
Guatemala197760555573653428
Honduras19761305489180108159932829
Iceland1977124751354170106233
Iran197736185801203849197848514271
Ireland197740685110
Israel197730390130791531374448724639
Italy19771093910814710412073100400190
Jamaica197773161301442556151196196087
Japan2857550601222041488
Jordan1975111308175198142152100197400355240
Kenya19777389104123400*138289443231115
Korea197765244892330261554104633
Kuwait1977989159732944272320794
Lesotho19741711488811110332318765
Liberia1977188311221483310011010194115
Luxembourg1977102287719163127439610
Madagascar19731033010310640023714119221993
Malawi197780638757121781411483471
Malaysia19771051311371376210656411553
Mali197611114913299260145601413642
Malta1977102299486125121143135202365154
Mauritius19771415118166181171104360147050
Mexico19774313825221714216340057
Morocco197720812816399295178152
Nepal1977439838400*400962092252
Netherlands197715073156132163157111
New Zealand1977713010912911412428148
Nicaragua197662456546400212269683120
Niger19771424616010940039435611068116
Norway19776212112092828430922712327118
Oman197427025162
Pakistan197739164152327241693146102117
Panama19771391162642732544981999988
Papua New Guinea19771104313316015148186121116101176
Paraguay19776751312014075272412151
Peru197791651117423575125203
Philippines1976791035250117603096166400198
Portugal197714025174918179845195210
Rwanda1977621315848400400*7394383267
Senegal1975112709766576755374210
Sierra Leone197812357102114266349561210954
Singapore1977195139935073011482152
Somalia197716017616716440030540021022455
Spain1977534247619386417341453
SriLanka19775827101824003013810622
Sudan197730933927564431742106
Suriname1976247116167192113769792
Swaziland19771234813211616101176160400
Sweden19779485154127123122869424040058
Syrian Arab Rep.197719218783012287159130400*254115
Tanzania1977951141061384001888113528617193
Thailand1977381558855400183727820400115
Tunisia197761261791511391416317878114
Turkey19776997973619255736312270181
United Arab Emirates1977176150331
United Kingdom197799112152110667926595131400112
United States25131885717876641819
Upper Volta1973822188567325024113155
Uruguay19782327257551391138323210775
Venezuela19776033119677778151248141155107
Yemen Arab Rep.197711140040552314284
Yugoslavia19773140015710312819
Zambia1977172157169101441052318490133
Mean10311010010313111210310095134101
Standard deviation571013860116671136811213850

Asterisk denotes that this particular IEC index should be treated with care as actual expenditures were extremely small and predicted expenditures negative—see text for explanation.

As the text explains in more detail, this index represents the actual expenditure/gross domestic product (GDP) ratio as a percentage of the predicted expenditure/ GDP ratio.

1973–75.

Asterisk denotes that this particular IEC index should be treated with care as actual expenditures were extremely small and predicted expenditures negative—see text for explanation.

As the text explains in more detail, this index represents the actual expenditure/gross domestic product (GDP) ratio as a percentage of the predicted expenditure/ GDP ratio.

1973–75.

Table 2.International Expenditure Comparison Index, 1977: Economic Categories of Expenditure1
CountryYear

of

Data
Current

Expenditure
Goods

and

Services
Wages

and

Salaries
Other

Goods and

Services
InterestSubsidiesCapital

Expenditure
Acquisition

of Capital

Assets
Capital

Transfers
Argentina197792562251151149583
Australia197710511811894164314
Austria1977967865140551139946107
Bahamas197690111116137893682
Bahrain19778583871451129151
Barbados1977991179817518648838083
Belgium1977956487100155108718778
Bolivia19778086875729127817266
Botswana19779385899914512211613949
Burma19779467
Cameroon19768810197103276417213280
Canada1977107108228763257
Chad19769881
Chile19771001051077015897841168
Costa Rica19777999932521625613321968
Cyprus197711213614810094889112296
Dominican Rep.1976736884422215190123111
Egypt19771601181161201882199969192
El Salvador197776702422610277122
Ethiopia1977137150138171708078905
Fiji1977931048812314746969660
Finland197796108359062115
France197783588986261108432397
Gambia, The1977143123921396814398873
Germany, Fed. Rep.1977102127608999392
Greece19778914521210770269611739
Grenada197794112116112455333
Guatemala1977746971526313012755307
Honduras19766796911064121213125325
Iceland1977966910660811338450171
Iran1976110102124831814012519021
Israel197710110180113181985350250
Italy1975884363311721226839114
Jamaica1977124102981283371609296104
Japan197772
Jordan197595100457711412292
Kenya19779590951001251438993
Korea1977837445974717314096155
Kuwait19771171031311231368570
Lesotho1974889282
Liberia19771141151288865174181124
Luxembourg19771039614217914292666057
Madagascar1973111107137763314794928
Malawi1977114966313820421813714384
Malaysia197790961137515098223115224
Mali1976921181795961018755
Malta1977106137135142687360105
Mauritius19771159410562173146906395
Mexico197779777293364539753
Morocco19778288112461086722717313
Netherlands19779247666156127114193
Nicaragua197672907610711333122146199
Niger19771081069016219116411365400
Norway1977112961391181735
Oman19741007616152117
Pakistan19771158714240073942
Panama1977103119119138200609053107
Papua New Guinea197713514719355363652
Paraguay1977859777104377215114849
Peru197794791991451009695
Philippines19761038464826531737
Rwanda1977848288831222898113
Senegal19751091301281443213210351400
Sierra Leone19781231268417911714079
Singapore19779010888111127291211873
Somalia197711273
Spain197791116125127287714319594
SriLanka1977102817984306109170128230
Sudan1977149783911340040092130
Suriname197611514714112120501411075
Swaziland1977941051141031868106122
Sweden19771131578989145400
Switzerland1977139152119111232
Tanzania19771121041011131351098246328
Thailand19778386621499398121185336
Tunisia19778279848111488136131225
Turkey1977100697845130183638422
United Arab Emirates197769400
United Kingdom1976937365104114124346261
United States197710313810177212400
Upper Volta1977961027419531157113319
Uruguay19789210599733089948712
Venezuela1977928298551257612541391
Yemen Arab Rep.19771121908
Zambia19771116037

As the text explains in more detail, this index represents the actual expenditure/ GDP ratio as a percentage of the predicted expenditure/ GDP ratio.

As the text explains in more detail, this index represents the actual expenditure/ GDP ratio as a percentage of the predicted expenditure/ GDP ratio.

In a paper of this sort, no brief summary of results is possible; the tables just referred to and the detailed discussions in Sections III, IV, and V present the results. However, five general conclusions are worth making.

First, many international cross-section studies of government revenue and expenditures use per capita income as a proxy for most of the underlying demographic, social, and economic differences,3 yet it is striking how uncertain per capita income is as an explanatory variable. This poor performance of per capita income compared with other variables suggests the importance of searching for the more robust, underlying, basic variables as is done in this paper.

Second, it is encouraging to note how plausible the modeled relationships are; it is also reassuring to see how most of the expenditure indices for individual countries reflect general knowledge concerning those countries’ performances and attitudes (for example, on defense, health, and social welfare).

Third, the technical coefficients of functional categories that determine economic categories of expenditure (see Tables 2, 6, and 7) are powerful and suggestive.

Fourth, there appears to be no clear support for the hypothesis that the majority of governments spend excessive amounts on wages relative to amounts spent on goods and services; some countries do appear to overspend on wages relative to other goods and services—some do not. However, a clear bias is evident toward greater-than-expected current expenditure relative to capital expenditure in Africa and in industrial countries; the same regions spend more than expected on subsidies relative to wages. The reverse patterns emerge in Latin America.

Finally, without a doubt, this exercise provides many “departure points” for discussions and assessments of government expenditure policies in individual countries.

Three conceptual points should be stated at the outset. First, there is a distinction between the international tax comparison index (hereinafter referred to as the ITC index) and the international expenditure comparison index (hereinafter referred to as the IEC index). The measurement of tax effort is helped by the fact that governments, to finance their operations in a sustainable and noninflationary way, must transfer private sector resource claims to the public sector using whatever “tax handles” they find at their disposal. Expressed in these basic terms, it is clear that in their tax collection efforts all governments have a similiar objective. There appear to be few substantial alternative approaches to the problem of financing expenditure that would not be captured in one form or another by the ITC index. The construction of an expenditure index, however, poses more complex problems, first, because government expenditures are directed at many objectives and, second, because many of these objectives can be achieved by the use of policy instruments other than government expenditure, for example, tax expenditures, price controls, tariffs, import restrictions. It may be possible to design indices for particular broad objectives (functional expenditure indices) but these single objective indices will be difficult to interpret unless steps can also be devised to take account of the different policy instrument mixes chosen by individual governments in the sample. (The most obvious example is the interchangeability of government expenditures and tax expenditures.)

Second, it is not intended that this paper should make normative judgments as to the appropriateness of a country’s functional expenditure priorities. The economic optimality of a given amount of spending on defense or education may be open to question in a cost-benefit sense. It is also questionable whether the objectives for a sector are being realized in a cost-effective manner, given the level of expenditure. Yet, ultimately, the public expenditure budget reflects the social and economic priorities of a country’s government and, presumably, of its population; thus, it is difficult to state that a country is spending too much or too little on a particular type of expenditure.

Third, the measures proposed in this paper are indications—possible starting places—for discussion. After all, if a country is spending, say, twice as much as might be expected (given its population structure, urbanization rates, economic structure) on education, it probably has a good sui generis reason, but policymakers should at least focus on the question and realize that such expenditure, although it may be justified, is unusual. It is not proposed that the expenditure indices presented in this paper should replace detailed country studies as a basis for actual expenditure decisions, but merely that they should provoke further analysis and discussion.

Section II discusses some further conceptual issues that arise in such an analysis and reviews the methodology used in this paper. (Readers interested only in the results could skip this section.) Sections III and IV discuss the results on a functional and economic basis, respectively. Section V discusses the balance in expenditure composition between wages and other goods and services, wages relative to subsidies, and goods and services relative to subsidies. The basic data appear in the Appendix.

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