THE SIZE AND SCOPE

OF GOVERNMENT
ECON 3440

Government in the U.S.

We have a federalist system, with three levels:
Federal
Regional (state)
Local

Each level performs certain functions; there is some

overlap.
Similarly, each level raises revenues in different ways, but
there is substantial overlap.
Ideally, each does what it is best at.
Not all countries have this kind of layered government.

ECON 3440 - PROF. WASSALL

Government in the US II
Federal functions:

Defense and foreign relations

Monetary and fiscal policies
Most income support programs
Most commerce and trade
Most health insurance and medical care programs
Some law enforcement

State functions

Highways and transportation

Some law enforcement
Some health and welfare programs
Some lower and most higher education

Local functions:

Most elementary and secondary education

Local law enforcement

ECON 3440 - PROF. WASSALL

The Size and Scope of Government

How do we measure the size of government?
By dollars spent?
By real (inflation-adjusted) dollars spent?
By dollars spent as % of GDP?

Should government spending include:

transfer payments (not part of GDP)?

spending by public enterprises?
spending by nationalized industries?
the cost of regulation?
tax expenditures?

ECON 3440 - PROF. WASSALL

Why Do We Care About the

Size of Government?
There is an alleged inefficiency of government-operated
enterprises. We will discuss this later.
When government takes over the supply of a good or service,
it usually becomes a monopoly. Thus there is a loss of free
market control over allocation, which instead becomes
determined by bureaucrats, voting and lobbying rather than
demand and supply. Examples: education, health care.
As sources of income to government, taxes have
distortionary effects on allocation, as opposed to revenue
from sales in private markets and to charitable contributions.
In these cases, people freely choose how much to spend and
what to spend it on.

ECON 3440 - PROF. WASSALL

Some Information on the Size

and Scope of Government in the
U.S.
Federal government spending has accounted for about
roughly 20 percent of GDP since the 1970s.
State and local government spending has accounted for
roughly another 10 percent.
These figures rose somewhat in the 2009-11 fiscal years.

ECON 3440 - PROF. WASSALL

The Size and Growth of Government: Federal

Spending as a Percent of GDP, 19302014

In 1930, the federal governments activity accounted for only about 3.4% of GDP.
From the 1950s through the present, the size of government has averaged around
20% of GDP, although it grows during recessions.
ECON 3440 - PROF. WASSALL

Spending, Taxes, Deficits, and Debts: Federal

Revenues and Expenditures, 19302014

With the exception of an enormous increase in spending unmatched by increased

taxation during World War II (19411945), the federal governments budget was
close to balanced until the late 1960s.
ECON 3440 - PROF. WASSALL

Spending, Taxes, Deficits, and Debts: Federal

Surplus/Deficit, 19302014

From the mid-1970s through the mid-1990s, there was a relatively large deficit, which
shrank dramatically in the 1990s. The United States was back in deficit by the early
twenty-first century, with the deficit becoming very large in the late 2000s.
ECON 3440 - PROF. WASSALL

Spending, Taxes, Deficits, and Debts: Federal Debt,

19302014

The stock of debt rose sharply in World War II, then fell steadily until large deficits
caused it to rise in the 1980s. The debt has risen considerably since, with a brief
pause in the mid- to late-1990s, and now is over 103% of GDP.
ECON 3440 - PROF. WASSALL

Spending, Taxes, Deficits, and Debts: State and

Local Government Receipts, Expenditures, and
Surplus, 19472014

Unlike the federal government, state and local governments budgets are typically
in surplus: there is very little deficit overall across the state and local governments
in any year. Why?
ECON 3440 - PROF. WASSALL

Distribution of Federal Spending, 1960 and 2014

In 1960, nearly half of federal government spending was on national defense. Today,
however, defense spending has fallen to less than one-fifth of the federal budget.
The Social Security program is the single largest government program in the United
States today.
ECON 3440 - PROF. WASSALL

Distribution of State/Local Spending, 1960 and 2014

Education, welfare, and public safety for almost 40% of state and local government
spending. The major development has been the parallel growth in health care
spending and the reduction in education spending. ECON 3440 - PROF. WASSALL

Distribution of Federal Revenue Sources, 1960 and

2014

Corporate tax revenues once provided almost 25% of federal government

revenue, they now provide only about 15%. Payroll taxes have grown from a
sixth of federal revenues to well over a third.
ECON 3440 - PROF. WASSALL

Distribution of State/Local Revenue Sources, 1960

and 2014

Over the past 40 years, the substantial drop in revenue from property taxes
has been made up by rising federal grants and income taxes.
ECON 3440 - PROF. WASSALL

What Do We Know about the

Size and Scope of Other
Governments?
Until after the mid-20th century, almost all governments
increased their share of spending in GDP.
At some point, the share of government spending in GDP
stabilized for advanced economies (though not all at the
same percentage).
The distribution of spending by category is similar from
(first-world) country to country. Defense and health are
probably the most variable.
Where countries differ:
The share of GDP devoted to government.
The extent of federalism (i.e., layers of government).
Their reliance on certain types of taxes.

ECON 3440 - PROF. WASSALL

Historical Development
The public sector has grown significantly over
the past century.
For a typical country the public sector was
small at the start of the twentieth century.
In the order of 5-10% of GDP

Expenditure then rose steadily for the next sixty

years.
There was a levelling-out of the growth toward
the end of the century.
Typically starting in the mid 1970s

ECON 3440 - PROF. WASSALL

Historical Development II
The growth of public
spending since 1870 is
shown in this slide.
There is a persistent
difference in the level
of expenditure among
the countries.
The pattern of growth
is similar across the
countries.
In 1996 public
spending was 32.4% of
GDP in the US and 55%
in France.

60
50
40

United States
United
Kingdom
Germany
France
Japan

30
20
10
0
1870

ECON 3440 - PROF. WASSALL

1890

1910

1930

1950

1970

1990

2010

Total expenditure, 1870

to 2010 (% of GDP)

Historical Development III

This slide provides more
detail for the past 30
years.
For all six countries
spending is higher in
2011 than in 1970.
For the UK and US the
increase is small.

60
55
50

Germany

40

United Kingdom

35

United States

30

Japan
Australia

25
20
15
1970 1975 1980 1985 1990 1995 2000 2005 2010

The cessation of growth

is apparent.
There is evidence of
convergence.

France

45

ECON 3440 - PROF. WASSALL

Total expenditure, 1970

to 2011 (% GDP)

The Size and Growth of Government: Total Government

Spending Across Developed Nations, 19602015

In 1960, the United States was squarely in line with the average of the OECD
in terms of the government spending share of GDP. Government growth was
much faster in other OECD nations in the 1960s and1970s. All have now
surpassed the United States.
ECON 3440 - PROF. WASSALL

Spending, Taxes, Deficits, and Debts: Debt Level of

OECD Nations in 2014

The United States has higher debt levels than most other comparable nations,
but its load remains well below others.
ECON 3440 - PROF. WASSALL

OECD General Government Spending,

2014

ECON 3440 - PROF. WASSALL

OECD General Government Revenue,

2014

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OECD General Government Debt, 2014

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Comparing Total Taxes as % of

GDP, 2010
60.00

50.00

40.00

30.00
Taxes/GDP
20.00

10.00

0.00

ECON 3440 - PROF. WASSALL

Top Combined Personal Income Tax Rates,

2008
60.0

50.0

40.0

30.0
Top rate
20.0

10.0

0.0

ECON 3440 - PROF. WASSALL

Taxes on Goods and Services as % of

GDP, 2010
18.00
16.00
14.00
12.00
10.00
8.00

2010 Tax Rate

6.00
4.00
2.00
0.00

ECON 3440 - PROF. WASSALL

U.S vs. OECD

ECON 3440 - PROF. WASSALL

Taxes on the Average Worker, 2014

ECON 3440 - PROF. WASSALL

Some Takeaways
The U.S. public sector grew relative to the size of the economy
throughout most of the 20th century.
By the early 1970s, the relative size of the U.S. public sector
leveled off in the range of 30-35 percent of GDP.
A similar event occurred in other first-world countries at roughly
the same time.
However, the share of government spending in GDP is different
from country to country.
The share of government in GDP in the U.S. is relatively low; for
example, it is 56 percent in France and 55 percent in Sweden.

ECON 3440 - PROF. WASSALL

Takeaways II
There are some differences in the amount the U.S. spends in
government services, as well as how they are provided, compared
to many other OECD countries.
We will look at these differences when we cover these services in
detail.
We saw some differences in the use of taxes.
Specifically, the U.S. exploits taxes on goods and services less
than most of its peers.
Because of this, despite an overall lower tax burden in the U.S.,
its marginal personal income tax rates are similar to those in other
OECD countries; its marginal corporation tax rates are higher.

ECON 3440 - PROF. WASSALL