Saturday, February 15, 2014

How much should the public sector consume?

The Fraser Institute has suggested that the public sector should consume 30 percent of the GDP for optimal economic growth. I am not sure about what data the Fraser Institute used to determine this level but the Rahn curve, suggest that the optimal level of government spending is 15 to 25 percent of GDP. If we check data from countries around the world, both current and historical, the data seems to lean toward the Rahn curve. Singapore and Hong Kong both have a public sector that consumes less than 20 percent of GDP and these are two of the fastest growing places on the planet. According to the Fraser Institute if these two governments spent 50 percent more they would grow faster while the Rahn curve shows that they are just right. Going back to some historical examples we have: Canada, before the 1920's had public sector spending of about 16 percent of their economic output and in the 1870's the U.S., Germany, France, Japan, Sweden, and the U.K all had government that consumed about 10 percent of their GDP. And in those time frames all these countries had rapid and major growth.

Reading between the lines of the Fraser Institute study and the Rahn curve you will see that they are actually calling for a reduction in the size of government (Rahn more so than the Fraser Institute). According to IMF data Canada has government spending of GDP is 41 percent, The U.S. is 39 percent of GDP and France is spending 55 percent of GDP.

So the moral of this research is that government is far too large in all developed countries of the world.


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