HOW much should a government spend on its people? That depends, technically, on what it actually earns. But popular expectations and welfare economics demand that the State spends as much as it can to promote equitable development, so we have deficit spending. But do governments with a high public spending ratio end up performing better?
Not really. In their December '95 study, two IMF economists, who tracked public spending in industrial economies over the last 125 years, conclude that government spend, which zoomed after the Great Depression, has yielded modest gains. In 1870, average public spending was only 8 per cent of the GDP. By 1937, it was 21 percent. By '94, the state's average slice of the economy had leapt to 47 per cent.
Public spending in the newly industrialised countries in, say, South-east Asia averaged only 18 per cent. And much higher in developed industrial countries—55 per cent in France, 48 in Germany, 43 in Britain, 33 in the US and 35 in Japan. Countries with the lowest rise in public spending since '60 were found more efficient and innovative, had lower unemployment, higher registered patents and the smallest black economies (as no high taxes were needed to pay for state largesse).
In '90, the black economy averaged 11 per cent of GDP in countries where public spending was over half of GDP, but only 6 per cent where it was less than two-fifths. So, the authors conclude, state spending needn't be any more than one third of GDP.
That may be too strong a medicine for developing economies; fiscal and political compulsions come into play here. To stiffen politicians' resolve, some have passed laws or set budgetary rules. New Zealand used such measures to slash spending in six years from 46 to 36 per cent in '94.
Even if government spend is high in developed economies, it's more efficiently accounted for and recovered. Few countries spend a lot on doles, grants or subsidies. Subsidies were 0.62 per cent of GDP in the US, 0.74 in the UK, 2.3 in Canada and 0.21 in Thailand. IMF, which considers only central subsidies, put India on top of the global heap, except in '93-94 when Sweden inched ahead with 5.92 per cent.