Front Matter Page

Fiscal Affairs Department

Contents

• Summary

• I. Introduction

• II. The Growth of Government from a Historical Perspective

  • 1. The period up to World War II

  • 2. The post World War II period

• III. The Composition of Government Expenditure from a Historical Perspective

  • 1. Government consumption

  • 2. Transfers and subsidies

  • 3. Interest payments

  • 4. Revenue

• IV. What Have Countries Gained from the Growth in Public Spending

  • 1. Historical developments in social indicators

  • 2. Government performance, social indicators, and government spending since 1960

  • 3. Newly industrialized economies

• V. Reforming Government

  • 1. The scope for reform

  • 2. The implementation of reforms

  • 3. Experiences with government reform

  • 4. Trends in the role of the state

• VI. Concluding Remarks

• References

• Tables

• Table 1 The Growth of Government Expenditure, 1870-1994

• Table 2 Government Consumption, 1870-1994

• Table 3 Government Expenditure on Subsidies and Transfers, 1870-1992

• Table 4 Social Expenditure Components, OECD Countries, 1960-1990

• Table 5 Government Expenditure on Interest, 1870-1992

• Table 6 Government Revenue, 1960-1994

• Table 7 Social Indicators before World War I until 1960

• Table 8 The Size of Government and Public Expenditure Composition in Different Country Groups

• Table 9 The Size of Government and Government Performance Indicators in Different Country Groups

• Table 10 The Size of Government and Economic and Social Indicators at Comparable Levels of Development, Selected Countries

• Table 11 Public Expenditure Development and Government Reform

Summary

This paper discusses the question of what governments should do and, more specifically, how much they should spend on doing it. It documents the expansion of public spending over more than a century in the industrial countries for which data could be found. Over this long period, the public attitude about the role of government has changed dramatically and has required government to play a progressively larger role. Institutional constraints on expenditure were relaxed which led to a remarkable increase in the share of public spending in GDP, especially in industrial countries.

On the basis of various social and economic indicators, the paper speculates that significant gains in social and economic objectives were associated with the increasing government role until the 1960s when the level of public spending for the most industrial countries rose to the range of 20 to 30 percent of GDP. The enormous growth in public spending after the 1960s, however, is less likely to have brought about further significant gains in social and economic objectives. The countries that did not increase their spending much beyond the level reached in the 1960s soem to have performed as well or better in terms of many of those indicators than those that did. Thus, in a way the Increase in public spending over the 1960-90 period can be ineffective.

The paper discusses various reforms that can be carried out by countries so as (a) to reduce the share of public spending in GDP while (b) trying to preserve the objectives that the state tries to achieve through its spending. The paper also briefly analyzes the experience of a few countries that, in recent years, have attempted to carry out major government reforms aimed at reducing the level of public spending. It outlines the major elements of these reforms. The paper concludes that in future years, the level of public spending is likely to fall as a share of GDP in industrial countries.