Proceedings from the ECFIN Workshop "The budgetary implications of structural reforms" - Brussels, 2 December 2005



Public debt ratio to GDP. There is a large body of literature providing evidence that
governments whose debt position threatens to become unsustainable will rein in public
expenditure (rather than increase taxes which will at best only bring short-term relief).
Hence in countries where public debt is high, government size will be negatively affected
and vice versa.

32. The type of electoral system is another factor that emerges from the literature as relevant for the
size of government (majoritarian voting rules yield smaller welfare systems), but it will not be considered
here (or rather this will be picked up by the country fixed effects). Baumol’s “cost disease”, which predicts
that as an economy grows the relative price of public services and hence the share of public expenditure in
GDP will increase, will be considered as already being captured by the per capita income effect.

33. Before considering the impact of structural policy stances on government size, we look at the
explanatory power of the controls (
Table 3). European countries generally portray higher primary
expenditure ratios, but also tend to score higher on debt, dependency, openness and lower on GDP
per capita than for example the United States. This suggests that the control variables are unlikely to be
able to explain the bulk of the cross-country variation in primary expenditure. Accordingly, country fixed
effects should play an important role, as confirmed by the estimation results.

Table 3. Primary expenditure and its standard determinants

Primary
expenditure ratio
_____(%_____

Debt ratio (%)

Dependency ratio
(%)

Openness (%)

GDP per capita (at
2000 prices and
PPp, US$)

1985-

1994

1995-

2003

1985-

1994

1995-

2003

1985-

1994

1995-

2003

1985-

1994

1995-

2003

1985-

1994

1995-

2003

Australia

31

33

29

30

17

19

35

42

34388

40831

Austria

47

47

58

69

22

23

70

84

33799

40647

Belgium

43

42

131

122

22

25

134

152

31551

38420

Canada

38

35

79

89

15

17

55

78

33499

38188

Denmark

49

52

74

63

23

23

69

80

34999

41837

Finland

47

48

30

58

12

13

52

69

30869

36492

France

46

48

42

67

21

24

43

50

34517

40164

Germany

41

43

39

60

22

25

50

59

37342

37164

Greece

31

35

74

110

22

27

46

50

16521

19717

Ireland

35

29

99

51

18

17

112

160

24755

42852

Italy

39

39

95

128

21

26

40

51

26902

31696

Japan

24

28

73

122

17

24

19

20

33239

37961

Netherlands

47

42

86

72

18

19

108

121

34166

42149

New Zealand

40

36

64

40

16

17

56

61

28474

32274

Norway

53

55

34

37

15

12

71

72

34502

46292

Portugal

30

37

65

64

20

23

64

66

19418

25232

Spain

33

32

53

67

20

24

37

54

24358

30583

Sweden

56

54

65

72

16

14

61

79

36600

40637

Switzerland

28

31

36

51

21

22

69

77

41653

43892

United

38

37

43

48

24

24

51

56

32993

40808

Kingdom

United States

31

30

68

66

18

19

20

24

44591

52872

EU151

38

39

62

70

19

21

59

72

27473

33304

Average

39

40

64

71

19

21

60

72

31864

38129

Standard

9

8

26

28

3

5

29

35

6670

7219

deviation

1. Unweighted average.

Source: OECD Economic Outlook 78 database.

55



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