• 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 |
Debt ratio (%) |
Dependency ratio |
Openness (%) |
GDP per capita (at | ||||||
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.
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