The growth of government and its underlying driver has been one of the most researched themes in the study of modern political science, owing much to its relevance to modern popular political participation and the public wariness of big government in a liberal oriented democratic society. Given the common experience in living memory that the expansion of the public sector seems to be irreversible, it is of little surprise that public, politicians and researchers alike all contemplate the question how big the government will grow to.
In the face of such a problem with highly a complex system of drivers, it would always be necessary to take steps back so it can be broken down into basic components. If we want to understand why does government grow, then the precursor issue of how the government grows need to be answered as the rationale can only be explored after the process is specified. Further we still need to take a step back to define what exact we mean by “Government”, “Size” and “Growth”.
“Government” in the normal conventional sense is the organisation or system of organisations through which the power of the state exercised, i.e. it is the means through which the state can impose its will on individuals. The problem of this definition is that it would be rather difficult to conceptualise into physical form.We will have to define what we mean by the power of state and involve the idea of sovereign.
So another way is to see government in its functional terms. The exact scholastic definitions can vary according to different theoretical focus, but it is widely agreed that the government consists of the legislative function, the administrative/executive function and the judicial/arbitrator function. These three functions combined set in place the system of rules under which the organisation of the society can be maintained and the actions of individual can be bounded. Thus allow order to emerge from anarchy. Confusion may arise here to assign these three functions to the distinct hall mark of modern democracy, but this is not necessarily true as autocracy or oligarchy governmentalso without exception have the trio as defining, executing and enforcing laws are equally important irrespective of regime type, albeit with the branches often combined under one super-intending entityunder autocracy and lackingthe “check and balance”. Any government, in order to govern effective, needs to have the legitimacy and necessary violence to create and enforce laws that specify the institutional set-up of a state or a society.
Another crucial important function of government is the provision of public services; the concept of which has been coined since the inception of Public Economy. This role could be traced back from the Roman viaducts, to the Great Wall of China and to the interstate highway of the US, and historically been recognised as the more visible contribution or value of a government. However to further extend this concept, the so called “public goods” doesn’t necessarily have to be narrowly defined in this demand driven way, after all the provision of state resources for the welfare of general publicis a relatively recent phenomenon, just to think of Pyramid of Egypt or Napoleon’s European War Expedition (although fervent French nationalist may debate for its merits). So to be more encompassing in our definition, we can think of this function to include the execution and materialisation of ruling class’s vision.Hence government is also an organisation which is able to amass the populace, pool common resources and command coordinated group actions to execute large scale social projects which private individuals do not have the incentive or the ability to undertake.
The third function is in its core the derivative of the first two, i.e. the government need to have income generating ability in order to be economically viable to perform the law/institutional maintenance, as well as carry out public projects. Here the predominant means is government’s monopoly of tax collection with the hidden threat of institutional violence. But governments’ financing also including asset sales/lease (Pre-industrial revolution England and socialistChina both owned large amount of land assets under state entity), exploitation of state owned resources, operating nationalised companies in state regulated market, public debt financing etc.
From the perspectives of those three functions, we can reach a more essential version of the definition for what a government is. It is a giant organisation or a system of organisations within a society or even just a population that draws from common resources to finance itself in an effort to maintain social laws and order as well as organise to take collective actions i.e. undertake public projects. Note here, in this stylised functional definition, the source of legitimacy and institutional violence is deliberately left out. Whether the government is organised through the free election of liberal democracy or unscrupulous acts of terror by a general in reality does not affect these three basic functions any government have to perform. Also this definition effectively integrates bureaucracy with politics, which could be argued to be an artificial division of public institution in the first place.
So when we consider the “size” of government, then we are in fact gauging how much human activities are devoted to facilitated those three functions, so arguably it would be most apt to think in terms of the economic resource outlay a government commits i.e. government spending to maintain operations. Tax revenue is often used as a good proxy given its role as the predominant income component, yet it would be advisable to be aware that this was not always the case in historically. In addition tax structure hence revenue volume could be subject to the reverse pressure from the spending side needs and evolve accordingly. Another proxy size measures include the quantity of government employees and public personnel, yet this introduces the problem of efficiency variations across the public to private spectrum.
It does not need much further elaboration to argue absolute size inform us little about the genuine size of a government. As the government and the public sphere it marked out is the platform on which private activities are conducted, it is natural that as the amount of private activities increases both the income channel to finance and the need for the facilitating public functions will expand accordingly. So the basis for examining any structural shift in the social organisation of government is the relative relationship between government spending and aggregate economic activity. Academic literatures use both GDP and GNP as percentage base which largely yield similar numbers.
The question is now becoming what is causing an ever growing proportion of aggregate social resources and human activities to be devoted to maintaining social order and provide for public projects. Is there more need for the public functions government provides from the demand side or has the government developed more efficient and less-intrusive revenue generating methods from the supply side enabling it to participate to a larger extent in the economy?
1.1 Some General but Important Initial Facts and Observations
Before examining the detailed empirical evidences and evaluate various theories, a few overarching observations can be made on the subject which should serve as good sanity check or logical boundaries. An effort to explain the growth of government should accommodate or at least not conflict with those basic facts.
i) Contrary to the modern common experience, government is not on a growth trajectory since the beginning of civilisation and the expansion of its activities and scale of influence is not pre-ordained as a rule of nature. Prior to 1700, government across the globe showed limited propensity to expand through extended period. City finance log from ancient Rome show that expenditure only increased by little in absolute terms even after spanning for over 400 years , so as a percentage of total economic output it may have actually decreased. Historical record of Chinese tax system shows that on average, the land tax in terms of crop submission was lower at 1600 AD than at 200 BC.
ii) The initial spurt of government growth occurred after England underwent the Glorious Revolution and led Europe into industrialisation and initiated the first round of globalisation. Albeit much spending is associated with the belligerency and inter-state politics of Europe at the time, and largely reflect the cost of war on different countries. Non-war related public expenditure genuinely took off around the turn of 20th Century and accelerated post Second World War
iii) Modern government spending upshots are most often concurrent with the occurrence of large social projects such as national wars, public education/health program, social security program, state investment of public utilities, etc. Inaddition, the governments across global spectrum have engaged in more and more economic activities which were originally operated by private market forces i.e. the scope and content of Government’s public provision function has dramatically increased and diversified.
iv) Governments irrespective of regime type experienced expansion in size, this can be observed across different types of democracies, socialist autocracies and resource rich monarchs. In addition, this is also observed for state at varying decree of economic development: the median central government spending as a percentage of GNP for 46 developing nations increased from 18.7% to 26.4%.
v) However, the powerful existence of a suspicion for large government and a reversion for high tax rate has been deeply ingrained in the mentality of democratic politics as seen from House of Common debate on 18th Century tax reform as well as the considerations of the founding fathers of the US when proposing the bill of rights. The concern of public intrusion of private rights has always been a strong resistance to the expansion of public sector.
vi) In the last 20 years, if not including the extra public spending incurred by the 2008 financial crisis, the government expenditure has maintained at a stable level while economic inequality amongst strata of population has increased dramatically.
1.2 What A Successful Government Growth Theory Should Achieve
A good theory or a theoretical framework should ideally:
i) Identify the common underlying factors and shared considerations that drove up public spending universally across governments, but also allow for country level specificity to be added on top to account for variations.
ii) Explain the timing of the initial and following rounds of expansion since the end of 19th century and provide insights into the potential structural shifts in the political and social settings that broke the stability pattern observed for over a millennium.
iii) Should clearly differentiate between factors that temporarily enabled growth during a particular time window from those that are continuously exerting the effect even till present day.
iv) How was the resistance for tax raise overcome and what was the common mechanism for government to increase revenue in order to fund the expansions.
v) If any country or region specific characteristics are identified to account for a fraction of growth, then we should not observe the same growth pattern in other nations without such traits unless other reconciliatory rationales can be supplied
2. Overview of Growth ofGovernments Across Periods and Geography
Again, the point to be stressed here is that government growth, just like inflation although taken for granted by modern experience, should not be seen as a default social order of nations. Although globally government size relative to economy has maintained stable, different countries started their individual institutional public expansion at different point both on the global historical timeline as well as their own stage of economic development. Here we give an overview of the long run historical experience of UK and US, the post WWII experience of OECDcountries and the post cultural revolution experience of China. UK and US, being the oldest and most economically influential capitalist democracies respectively, are the bases on which the most substantial amount of academic work is built upon. OECD is a Post Second World War creation and represents the most successful capitalist nations across the global. The group offers a relatively homogeneous population in terms of its economic and social structures, but manifest differing government growth rate as countries adopt the welfare state in varying degrees and develop into different modes of capital. China’s experience in government growth and public finance expansion is more or less is a black box which is little covered by mainstream literature on the topic. The Chinese state is an autocratic regime, believes in a contrarian ideology and organise its political power structure and bureaucracy in a distinct way without many of the democratic mechanisms that incentives. Nonetheless, the Chinese government fulfils the opening definition of raising finance to fund institutional maintenance and engage in public projects/services provision. The a review of China’s perspective may greatly contribute to the discourse by providing a powerful mirror to show what commonalities in government growth experience are manifested which then cannot be attributed to the US/UK way of political organisation, but should be sought amongst aspects more fundamental in the way human political organisation functions.
2.1 Government Growth in the UK
The size of government as a share of the economy has been on a rising trend since the Glorious Revolutions of 1688. In the 19th century, the government share of the national income declined from its Napoleonic Wars peak to levels of more than a century before which marks that after two centuries, the real public spending of UK government on non-war items did not change much.
Since the turn of 20th century, UK’s public spending swelled from 12% of GDP to 48% as of now, recording a 300% increase. This is in contrast of huge decline in national defence budget which peaked at 46.4% in the height of World War II to the current 2.5%. The biggest two areas of growth is NHS spending and social securities (welfare transfer and pension payments). Health care spending grew from 0.5% to just over 8% and social security’s balloon from 0.7% to just under 15%. Education spending after doubling in the first half of the Century, fluctuated between 4% to 6% of the GDP since 1960s.
What is notable is that there are two rounds of major public expansion following both WWI and WWII. The first round displayed a more dramatic upshot trend and maintained at a plateau until the breakout of WWII. The post WWII round exhibited a continuous upward trajectory which continued to present.
2.2 Government Growth in the US
In the first 100 years of US history, the tax level was low by today’s standards. Government revenues predominantly came from two sources: revenue tariffs and land sales. The limited sources of revenues for the federal government were a natural restraint on its expenditure. Average annual rate of growth for tax in real term after adjust for inflation amounts to 5.5% compounded from 1792 to 1974. Prior to 1900, the growth rate was around 4.75%. Since then it has accelerated to 5.4% while the Real GNP rose at an average rate of 3.17% during this century. Correspondingly, in 1900 government spending amounts to c. 8% of GNP, this number has grown to 36.5% by 1980.
Especially during the 2nd quarter of the 20th century, period from 1929 – 1950, a series of significant political events occurred including the Great Depression, New Deal Program, World War II, which are all coupled with drastic intervention by the Government. Real tax growth reached 7.17% while the economy grew at an average of 2.92%. During the 10 years between 1929-1939, government spending in fact doubled from 12% to just under 25% of GNP. In the third quarter of the century, tax at all level and spending continued to rise, albeit at a slightly slower pace. Tax growth decelerated to around 4.5% and spending continued to climb to 42% of national income. Domestic social transfer which grew from a small base of 1.1% before the Great Depression to 3.5% at the beginning of WWII, then surged from 5.5% in 1949 to 13.5% in 1976.
Similar data is reflected through employment where the public sector employment grew twice as fast as the total labour force. All level US bureaucracy (Federal, State and local) employment grew at 4.5% compounded since 1900 to 1974, as a proportion of total workforce grew from 4% to 15%.
2.3 Government Growth in OECD
In Nutter (1978), the proxy of government spending/ national income is used and he conducted cross comparison of OECD countries and the US from 1953 to 1973. Median percentage in 1953 of OECD samples are 34% and it rose to 49% in 1973. So it seemed that across the board, it is fair to say that OECD countries have seen public growth of 1/3 on its original basis.
There is also significant variation in both the level and the rate of change in the scope of public economy among 18 nations. In 1960 public economy averaged 28.5% of GDP, ranging from 18% in Spain to 35.4% in Germany. In 1975, average expanded to 38.5% with Japan at 23.5% and Netherlands at 53.5%
Overall, external expenditures represented a small and dwindling faction in comparison to domestic spending. Median dropped from 6.1% to 4.9% while that of domestic rose from 28% to 48%. This is perfectly in line with the post WWII political stability across OECD countries.
The largest government (public spending as a percentage of national income) in 1950s were Germany, Franceand UK. By the 1970s, North European welfare states clearly emerged and the top three were occupied by Denmark, the Netherlands and Norway. Japan and Switzerland have consistently maintained the two smallest governments while Sweden is both the fastest growing as well as the largest by 1970s.
2.4 Government Growth in China
On the cusp of China’s Reform and Opening, the country runs a balanced albeit highly planned budget with public revenue accounts c. 31% of GDP. The country underwent public finance reform and tax restructuring in 1994 and adopted the modern multi-category market based tax system similar to that of conventional practice in the developed countries. Since then the tax revenue experienced steady expansion from 11.2% in 1994 to 18.2% in 2010. Differing from UK and US, China finances a relatively small proportion of its public finance through debt, central government bond aggregate to 7 trillion CNY in 2010 (c. 20% of GDP in the same year) with only 0.8 trillion new finance (2% of GDP).
From 2007 to 2010, government revenue climbed from 26.7% of GDP to 33.7%, curiously tax revenue maintained a steady rate hovering just above 17% while the revenue from the transfer of land usage increased from 2.7% of GDP to 7.3%; the revenues from public fund investment reached 9.2% of GDP from 4%; the much hyped super SOEs of China which made headlines in corporate news around world with their newly gained colossal market cap and profit stream, did not actually contribute a remotely significant portion of the revenue at 0.1-0.3%.
In terms of expenditure, the bulk of expenditure is on economic activity and infrastructure investment, but its weight in the overall public expenditure has shrunk from 40% in 1996 to 26.56% in 2006, representing shifting focus in China’s public finance. The social security and welfare transfer increased from a insignificant level at 0.26% of GDP to 2.26%, while healthcare and education hovered around 1% and 2.5% of GDP.
