I’ve taken Tanzi’s numbers and presented them in the accompanying Figure I. One modification I have made is for the numbers for Canada as Tanzi only begins those in 1920. I’ve gone back and obtained GDP estimates for Canada for 1870 and 1913 as well as made estimates for general government spending. Federal government spending was simple enough - I got those numbers from W. Irwin Gillespie (1990) Tax, Borrow & Spend: Financing Federal Spending in Canada , 1867 to 1990. Provincial and local spending were a more difficult issue.
As for the transfer partners, I was able to dig out Moore and Perry’s 1966 Canadian Tax Foundation monograph, The Financing of Canadian Federation: The first hundred years and obtained the value of federal transfers for the provinces in 1873 and 1915 from a table as well as their share of provincial revenues. This allowed for an estimate of total provincial revenue in those years, which I used as an estimate of what they spent and assigned them as such to the estimate of Canadian general government spending for the purposes of the Figure for 1870 and 1913. As for local government spending, the Moore and Perry figures show it was approximately equivalent to provincial spending in the immediate post World War II era so I decided to set local government spending in 1870 and 1913 as the same as provincial spending. This probably means that spending in 1870 and 1913 may be either over or underestimated depending on whether pre 1900 local government spending was greater or less than provincial spending.
The results? Well, the figure paints what a first glance seems to be a very simple picture of an expanding public sector over time as measured by the public expenditure share of GDP. In 1870, the average public sector size for the countries in the figure was just under 11 percent and by the eve of the First World War had crept up to about 13 percent. Public sector size reaches 20 percent by 1920 and on the eve of the Second World War is about 24 percent. It is the post World War Two period that sees the most robust expansion. Between 1937 and 1990, the average rises from 24 percent to 43 percent and then abates somewhat to approximately 42 percent by 2007 – the eve of the Great Recession.
There are some interesting national variations in this small set of countries. In 1870, the smallest public sectors were in the Nordic countries of Sweden and Norway while the largest public sectors belonged to Switzerland and Australia at 16.5 and 18.3 percent respectively. By 2007, the smallest public sectors also belonged to Switzerland and Australia at 35.4 and 34.9 percent respectively. Sweden, which had the smallest public sector of this set of countries in 1870 – at 5.7 percent – was the largest in 1990 at 59.1 percent and remained tied with France for the number one spot in 2007 at 52.6 percent.
The 1990s marked the end of the general expansion of public sector size in this set of countries at least in average terms but there is again variation across countries as some countries shrank their public sectors while others expanded. The biggest percentage drops in the government expenditure to GDP ratio for these countries were for Norway and Canada. Norway drops from 55 to 41 percent while Canada drops from 46 to 39 percent. An expanding GDP due to oil resource revenues is undoubtedly a factor in the Norwegian case. Interestingly enough, public sector size in the United States, the United Kingdom and Japan grows from 1990 to 2007. The biggest percentage increase in public sector size between 1990 and 2007 is for Austria, which saw the government expenditure to GDP ratio grow by 24 percent – from about 39 to 48 percent. These dynamics may be easier to see in a different plot of the same numbers – see the second figure.
Obviously, there is no one size fits all international pattern when it comes to the historical ebb and flow of public sector spending and public sector size. Happy long weekend!