“The era of big government is over,” Bill Clinton memorably declared in his 1996 State of the Union address, and few disagreed with him. But since the financial crisis, Leviathan has risen from its slumber.
In my column in this week’s magazine, I look at the growth of the state across Europe. Last year, 11 of the 30 OECD member states devoted more than 50 per cent of their GDP to public spending (see Table 25 here). And, for the first time in recent history, a Nordic country didn’t top the table. Instead, Ireland, where state expenditure was just 36.8 per cent of GDP in 2007, led the way. The country’s spending swelled to 66.1 per cent as a result of its €50bn bank bailout.
In the UK, spending stood at 51 per cent in 2010, up from 40.6 per cent in 1997 and well above the OECD average of 44.6 per cent (NB: the OECD uses a wider definition of spending than the Treasury, which put UK spending at 47.4 per cent of GDP in 2009-2010). The coalition’s £81bn spending cuts will reduce this to about 43 per cent of GDP, a level last seen in 2004.
The position of France, where government expenditure was 56.2 per cent of GDP last year, is equally striking. Nicolas Sarkozy, who once promised a “rupture” with the French social model, has revived the country’s dirigiste tradition.
Public spending, 2010 (% of GDP)
But what are the implications of the growth of the state? In the left’s favour is the fact that high levels of public spending are associated with low levels of inequality. Income ineqality is highest in low-spending states, such as Singapore and the US, and is lowest in high-spending states such as Denmark and Sweden. Empirical evidence also suggests that the most equal countries are the most socially mobile.
Unless the coalition reduces inequality – through redistribution or smaller pay differentials – it will struggle to fulfil its pledge to widen economic opportunity.
In the right’s favour is the fact that high public spending is associated with lower levels of economic growth. A paper published last week by two Swedish economists, Andreas Bergh and Magnus Henrekson, found that an increase in government spending of 10 per cent of GDP reduces economic growth by between 0.5 per cent and 1 per cent on average.
To my mind, the negative consequences of inequality, which, as The Spirit Level demonstrated, is associated with high levels of crime, mental illness, teenage pregnancy and obesity, as well as low levels of social mobility, trust and child well-being, outweigh the negative consequences of lower economic growth. But, contrary to what we were told by New Labour, prosperity and equality don’t always go hand in hand.