The government, that drag on the economy.

In the previous post, on why economic recovery was being compromised by excessive and useless government spending I quickly illustrated my point with a table showcasing government expenditure in percentage of GDP and also average tax burden on percentage of GDP. I did not analyze the data from the table though, it deserved its own post. So let us have a look at how much money the governments need in some countries:

2011 data from The Heritage Foundation , The Wall Street Journal via Wikipedia

The highest percentages on government spending are found scattered across developed countries, specially in Europe. On Baltic countries (Denmark, Finland, Iceland, Norway and Sweden) we can see the percentage even goes over 50% of GDP . No surprises here, blame it on their splendid welfare systems everybody loves... The real problem is not welfare systems themselves, but the progression of the government spending in the latest years. People would agree with me than welfare systems and social measures have not increased during the last 5 years, in any case they have been reduced, but government expenditure on the other side has kept growing, as plotted in the following chart for the biggest economies in Europe.

Credit: Eurostat

The corrections on the growing trend seen in the 2010 data, as you may expect, are related to the austerity packages endorsed by the European Union to fight the financial and debt crisis. But these corrections have been too soft to correct the situation. Economists and traders everywhere (The Economist devoted an issue to this matter) see the situation as unbearable, which explains the rising concerns on sovereign solvency that has plagued the markets and has already blasted through Greece, Ireland and Portugal.

But if this has been this way for a long time, what can possibly have changed to make the situation so worrying for developed countries?

Until now, GDP growth rates had been high enough to help bear the never-ending expansion of government and the rising costs of welfare and social security systems. But the future does not look so bright for the big spenders. With GDP growth rate estimates of well under 2% for most of the world's developed economies (projection data taken from IMF's World Economic Outlook 2011) government spending must go down immediately or it will continue jeopardizing the economic recovery of developed countries. 

On the other side of the balance we have emerging economies, take a look at the numbers for the BRICS countries as an example. With the exception of Brazil, who is stuck at a worrying 41% of GDP, none of them go over 35%. Economic growth is what takes them forward, not the government. A government should only be responsible for setting a comprehensive set of rules for the economy to follow, but it must not take the starring role. However, government expenditure for these countries has been growing steadily in the last years.  If they do not intensify their efforts to control the situation they could find themselves committing the same errors other developed countries did sooner rather than later.

View of Singapore's Marina Bay

And for anyone who is thinking that yes, emerging countries have lower government expenditures but it is because their social measures are slender... Let me introduce you to Singapore, government expenditure 17% of GDP, less than 6% total unemployment, GDP growth projections of more than 4% until 2016 (IMF data) and one of the best education systems in Asia. 

Singapore may be the clearest example of how a government can help develop economy (knowing that education is key for this) without interfering on it.