The Untold Tale of How Government Got Big

Frontier Centre, Role of Government, Taxation, Uncategorized, Worth A Look

In 1870, your average industrialized country needed only 10.7 per cent of its gross domestic product to fund its military, run its courts, build its roads and bridges, and provide for its sick and needy. U.S. governments (federal, state and local) needed a mere 7.3 per cent of GDP; Britain, 9.4 per cent. Almost perfectly aligned with the average among 14 countries, Germany needed 10 per cent.

By the standard of the times, the French were off the chart: 12.6 per cent. (In 1888, Paul Leroy-Beaulieu, a French economist, defined "moderate" government spending as 5 per cent of GDP, "excessive" as 12 per cent.) This wasn't laissez-faire exactly, but it came close. In this heyday of classic liberalism, the best government was still deemed to be the government that governed least.

Forty-four years later, with European governments arming for the First World War, the average level of government spending had risen, in some countries precipitously. At 7.5 per cent of GDP, indifferent to the impending conflict, the U.S. remained the most frugal. Britain had increased its public expenditures by a third (to 12.7 per cent), Germany and France by almost half (to 14.8 per cent and to 17 per cent). Yet the average had risen only marginally (to 11.9 per cent).

It was the five-year conflict that ended limited government. By 1920, the public spending of the average industrialized government had risen by two-thirds — to 18.7 per cent of GDP. U.S. spending had reached 12.1 per cent; Britain, 26.2 per cent; Germany, 25 per cent; France, 27.6 per cent. In Europe, only Sweden and Spain had managed to keep spending close to 10 per cent.

With its temporary wartime income tax now permanently in place, postwar Canadian governments required 16.7 per cent of GDP, roughly twice the 1870s level. And the Great Depression was yet to come. And the Second World War. Ironically, though, it was neither of these epic misfortunes that produced big government as we know it now. By 1937, the average spending level had crept higher — to 22.8 per cent. This was indeed twice as much spending as governments had needed in 1913. But the Depression had shrunk GDP, making the level of spending appear relatively higher than it really was.

These statistics are compiled from Public Spending in the 20th Century, a fascinating work published in 2000 by International Monetary Fund economist Vito Tanzi and European Central Bank economist Ludger Schuknecht. The dramatic conclusion of their analysis? It wasn't the world wars that pushed government spending to unsustainable heights. It wasn't the Depression. It wasn't the socialist century. It was two decades of naive public spending between 1960 and 1980. It was the reckless piling up of expenditures that could not be reversed, described by Mr. Tanzi and Mr. Schuknecht as "the tyranny of past commitments."

By 1960, the average spending of industrialized countries' governments was 28 per cent of GDP, higher in most countries than it was in 1936 — but not by much. By 1980, the average was 43 per cent.

Belgium, Ireland, Japan, Spain, Sweden and Switzerland — all had doubled governments' share of GDP. Indeed, the governments of Belgium, the Netherlands and Sweden, by 1980, required more than 50 per cent of GDP. Only the U.S. and Japan managed to restrict spending to 30 per cent of GDP. As Mr. Tanzi and Mr. Schuknecht put it: "The expenditure growth from 1960 [forward] was equal to the growth in the previous 90 years — even though these years were free from major war and from depression." We got big government, in other words, only when we no longer needed it.

By 1990, the average expenditure level of the 14 industrialized nations reached 44.8 per cent. By 2000, 45.6 per cent. The tyranny of past commitments drove government expenditures toward ever-higher shares of GDP. Governments discovered they could increase spending but couldn't cut it. Canada hit its peak peacetime spending level — 53.3 per cent of GDP — in 1992. It took the dysfunctional team of Jean Chrétien and Paul Martin first to arrest the inexorable expansion of government, then to reverse it — without question, the primary achievement of the Chrétien decade.

By 2004, Canada's government demanded only 40 per cent of GDP.

In this sense, you could say that Mr. Chrétien repealed Brian Mulroney but neither Lester Pearson nor Pierre Trudeau. The public debt that we carry from the sixties and the seventies remains a big part of big government. In 1960, we paid $1-billion a year in interest on our public debt, which stood at 26.1 per cent of GDP; in 2005, we paid $62-billion a year in interest on our debt, which stood at 32.2 per cent of GDP. (In 1996, government debt reached its highest peacetime level at 67.5 per cent of GDP.) Simply by paying off this debt, we could reduce big government by six percentage points — taking us back to 1960-sized government. This would permit a permanent tax cut of roughly 20 per cent.

Most of the industrialized countries are now slowly retracing the upward spending spiral. Demographic changes ahead will drive spending further down. As measured against GDP, governments will indeed get progressively smaller. We're a long way from laissez-faire. But we're moving toward it and we're closer now than we were 10 years ago. And it's no further down than it was up.

 

Niels Veldhuis is Associate Director of Fiscal Studies at the Fraser Institute