Academic journal article Atlantic Economic Journal

What Are the Determinants of Public Spending? an Overview of the Literature

Academic journal article Atlantic Economic Journal

What Are the Determinants of Public Spending? an Overview of the Literature

Article excerpt

Introduction

The overall growth of government spending over the last 150 years in industrial societies is an established fact. Government expenditures in 2015 represented 40.9% of gross domestic product (GDP) on average across Organisation for Economic Cooperation and Development (OECD) countries. The highest government expenditure levels, as a share of GDP in 2015, were in Finland and France (both 57%) (OECD 2017). In 1872, Government expenditures represented 11% of the GDP in France.

Economic theory has produced important literature to explain this general growth of government expenditures (Mueller 2003). This article was created to be a synthesis of determinants of the rise in public spending. This study set out 23 explanations and 78 explanatory variables. These 23 theories were classified into three groups: demand models, supply models and constitutional models. In demand models, the size of the government reflected the preferences of citizens. So the state was implicitly impotent. In supply models, conversely, the state was omnipotent. Politicians and bureaucrats were seen as having power to impose their interests against those of their citizens (Mueller 2003, p. 530). The government would spend as much as it could collect from its citizens. The constitutional model was based on the idea that constitutional rules were constraints that governments faced in raising revenue. Constitutions prevent (or not) the state from using its power in a discretionary manner. Low constitutional constraints were associated with a rise in public spending. The demand and supply models were very popular. This was a consequence of the Public Choice school's contribution, which formalized political choice as an exchange. The constitutional models explanations were historically less well known, but have been very present in the most recent works.

The Public Choice school formalized political choice as an exchange. Political exchange was radically different from an economic transaction (Buchanan 1954). i) First, government traded a package of public goods, ii) Second, public goods were financed by tax. For this reason, it was an exchange with no direct relationship between what you pay and what you get. There was no price coordination mechanism (Facchini 2000). iii) The government was a monopoly and iv) the relationship between voters and the government was asymmetric in terms of power. The State had coercive power, v) The voters exchanged programs and promises but not policies. The voters could support candidates that eventually lost, in which case they got nothing in return, vi) The exchange was multilevel between voters and politicians, politicians and bureaucrats, interest-groups (lobbyists) and politicians, and politicians and themselves, vii) Finally, political exchange was both a choice under the rule and a choice of the rules. The choice of rules was the constitutional choice. The constitutional rules were electoral rules, the political degree of political participation, public management rules and currency constitution, i.e. all the rules that constrained the Leviathan in its trend to increase the tax and its budgetary power. All these political exchange characteristics gave a complex vision of the political and budgetary process and were useful in interpreting the results of the empirical literature.

Nonetheless, the aim of this article was not only to update the existing literature (Mueller 2003) on an area as important as public spending, but also to inform debate surrounding the contribution of macro econometrics to the dynamics of economic systems. The ability of quantitative analysis to teach about the causes of public spending growth was studied from Rodrik's perspective. Rodrik's conclusion was that economists learn nothing from regressing economic growth on policies (2008, 2012). This paper's conclusion is less radical, but did support the notion that econometrics is only one way to report the history of public finance. …

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