Headlines: March 15th, 2006

A new report says there is evidence that low spending governments can provide better public services than their higher spending counterparts. The study also claims more equitable outcomes and improved standards of living can be achieved with less spending. The report, “Lean, not mean: how small government works” has been written by Keith Marsden, an economics consultant to a number of UN agencies, and is published today by the Centre for Policy Studies.The study uses data from published reports from international organisations such as the Organisation for Economic Co-operation and Development, the International Monetary Fund, World Bank, United Nations and the WTO, and examines the performance of 10 OECD member countries over the last two decades. Five countries – Canada, Ireland, New Zealand, Spain and the United States are classified as having ‘leaner governments’ that have reduced their tax take over the period under review. Britain is one of five countries listed as having a ‘larger government’ along with France, Germany, Italy and Portugal.

Keith Marsden says the results are striking. He finds that per capita income was 12 per cent higher in leaner government countries in 2003 and that their real GDP grew faster. Significantly, he says, leaner governments also expanded their spending on public services at a faster rate. Their average growth rate in public spending went from 2.4 per cent a year in the period 1980 to 1990 to reach 4.3 per cent in 2000 to 2005. Over the same timescale the growth in public spending fell for larger governments from 2.6 per cent to 2.2 per cent.

The study also says total spending on health is higher under the leaner governments. For example, in 2002 they spent an average of 9.5 per cent of GDP on health compared to 9.2 per cent by the larger governments. There is a similar pattern in education but the two groups spent similar amounts on income support to people of working age. The report also claims that reductions in government expenditure by leaner states have not widened the gap between rich and poor.

Keith Marsden says, “It may be surprising, even counter-intuitive, to find that countries with leaner governments spend more on health and education than those with larger governments,” and he continues, “but the data presented here should give policy-makers some confidence in arguing their case. It may be difficult to persuade people that less really is more. But it would still be right.”