Public Spending in the 20th Century: A Global Perspective

Published by EH.NET (October 2000)

Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A

Global Perspective. Cambridge and New York: Cambridge University Press,

2000. xvi + 291. $64.95 (cloth), ISBN: 0-521-66291-5; $22.95 (paperback),

ISBN: 0-521-66410-1.

Reviewed for EH.NET by Roger Middleton, Reader in the History of Political

Economy, University of Bristol, UK.

This is an ambitious work which can be approached from two standpoints: of one

that revisits Colin Clark’s (1945) much-cited hypothesis that there is some

critical level of public expenditure beyond which diminishing returns prevail;

and of the other as a contribution to the current global debate on economic

policy which is now dominated by the question of which model of capitalism

works best. In one sense few economists are better qualified to undertake

this study than these authors. Tanzi is the Director of the IMF’s Fiscal

Affairs Department and Schuknecht the Principal Economist in the European

Central Bank’s Fiscal Policies Division. Both have made significant

contributions to the applied fiscal policy literature and to the political

economy of state reform. But this book has ambitions to be more than a study

of the current policy debate; it purports to be a historical survey of the

growth of government since c.1870. Both seem to be economists, however,

largely innocent of the ways of economic historians and of the economic

history literature – also that of comparative public policy – and this has

quite significant ramifications for the conduct of their study and the

interpretation of the evidence. The problems raised are various. They range

from extraordinary statements, such as a reference to Keynes (1926) as ‘a

little known book’ (p. 4), through gross stereotypes of episodes in the

history of economic thought and policy regimes, and onward to ignorance of so

much of the literature on both government growth and the interpretation of

long-run economic growth (of which more later). There is also a populist tone

to much of this book which will grate with some readers, and not just those on

the political left who will in any case be unconvinced by the ‘Washington

consensus’ message.

But, enough of this for the present and instead let us progress to the

structure and organisation of this study, and of its conclusions, for there is

much here that is very valuable. The basic thesis is established early: that

the growth of public expenditure since c.1870 was not caused by inevitable

forces that made it imperative; that in terms of the standard socio-economic

indicators (taken as proxies for government policy objectives) smaller, better

focused government is better able to deliver than is big government; and,

therefore, there exists significant scope currently for the big spending OECD

states to contract their public sectors. Moreover, they argue, such fiscal

consolidation can be attained without incurring major economic or political

penalties. This thesis is pursued through four parts to the book: I, ‘The

growth of government: a historical perspective’ (chapters 1-3); II, ‘Gains

from the growth of public expenditure’ (chapters 4-6); III, ‘The role of the

state and government reform’ (chapters 7-9); and IV, ‘Recent experiences of

countries in reforming the government’ (chapters 10-12). The first two parts

rely heavily on two long-term cross-country datasets for the OECD states: one

on comparative public finance (where, despite the book’s title, revenuedata

is also included and analysed) and the other on socio-economic indicators.

These are provided for benchmark years (c.1870, 1913, 1937, 1960, 1980 and

1990s) and sub-periods (for growth rates) for as many of the OECD states, and

for as wide a range of social and economic indicators, as can be amassed as

far back towards c.1870 as is possible. The underlying data is a useful

resource in its own right, but it is unfortunate that the authors know so

little about the public finance history of the individual states (including

the existence of data sources often more suited than those general

statistical collections they have used) and are unaware of important

comparative work by authors such as Gemmell (1993), Steinmo (1993) or Castles

(1998) which covers much of the ground they do but tells much richer stories

about the growth of big government.

Tanzi and Schuknecht’s account of the rise of big government posits a

watershed around 1960. Until that point, and for the majority of countries,

the rise in public spending was matched by improved economic and social

welfare, whereas thereafter diminishing returns became established. They find

the rapid growth between 1960-80 remarkable, given that it occurred when most

countries were not engaged in war effort, there was no depression and the

demographic developments were generally fiscally friendly. Their explanation

is in terms of changed attitudes towards the role of the state – ‘the heyday

of Keynesianism and the time when governments were perceived by many to be

efficient in allocating and redistributing resources and in stabilizing the

economy’ (p. 16). My problem with such arguments is that they attempt to

provide overarching explanations for discrete blocks of time. An economic

historian would not work with 1960-80, would want to factor OPEC into the

argument, would raise doubts about the hegemony of Keynesianism in all OECD

countries, and would in any case retort that Keynesianism was in crisis during

the period of its supposed heyday and that fiscal retrenchment began well

before 1980 in some countries (Britain being a notable case).

I have problems also with the next stage, which involves dividing the OECD

into three groups on the basis of their 1990 status as having big, medium or

small public expenditure/GDP shares. The big spenders (shares of more than 50

per cent) thus comprise Belgium, Italy, the Netherlands, Norway and Sweden;

the medium (40-50 per cent) Austria, Canada, France, Germany, Ireland, New

Zealand and Spain; and the small (less than 40 per cent) Australia, Japan,

Switzerland, UK and the US. If the purpose of the exercise is to show that

between 1960-90 socio-economic welfare advanced more relatively in the small

spending group, then it matters intensely when and how we measure small. For

example, anyone who knows anything about the political and economic history of

postwar Britain will have reservations about the inclusion of the UK in the

small group, knowing full well that its ranking in the OECD in 1960 was very

different. Is a single observation, therefore, the appropriate way to proceed?

We have also the problem that the small group is dominated by the US, and

indeed this creates serious problems for the authors when it comes to the

social stability indicators where in terms of the propensity to imprison the

population and the divorce rate the US is quite out of line with the rest of

the OECD.

There is also a problem of conflation in the argument that the small group

have enjoyed the greatest relative gains in economic welfare since 1960

because they have not been afflicted by big government. As is well-known

amongst economic historians, comparative growth rates need in the first

instance to be located within a long-term catch-up and convergence framework

to accommodate the differing potential that individual economies have to grow

more rapidly than average to attain the GDP/worker-hour levels of the

productivity leader(s). There is no mention of this, and many will in any case

be unconvinced by what is described as the ‘new, modest, and understandably

controversial approach’ (p. 74) of inferring changes in socio-economic welfare

at the level of the nation state directly from improvements in the values of

the relevant socio-economic indicators. It is important to record that there

is no formal hypothesis testing here, no econometrics of any sort, and this

methodology is quite incapable of distinguishing causation from association.

For example, they argue that ‘countries with a large share of public provision

and financing of health care, such as the United Kingdom, do not show better

indicators than countries with a relatively smaller role for government in

health, such as Switzerland. It is therefore questionable as to how far

growing public expenditure is still contributing to these improvements.

Progress in health indicators seems to be more correlated with technical

progress and access to health care does not seem to differ much between

countries any more’ (pp. 91-2). What is not mentioned is the well-established

relationship between health and income (and its distribution) – as their Table

IV.2 (p. 79) shows GDP/capita was very nearly twice as high in Switzerland as

in the UK in 1990 and 2.14 times as high in 1960.

The book is on more solid ground, and makes more of a contribution, in two

areas. It provides a convincing account of how in practice the redistributive

effects of the interaction of welfare spending and tax regimes produce little

differences between the big and small spenders because when the total tax

burden becomes a large share of a country’s GDP, it is no longer very

progressive and, equally, when public transfers become very large, they tend

to be poorly targeted. Secondly, parts III and IV of the book provide a useful

summary of the Washington consensus on what the role of the state ought to be

and a blueprint for its achievement. It is thus likely to be widely read in

policy circles, but those who want more nuanced accounts of what occurred in

public spending will have to look elsewhere.

Roger Middleton’s recent books include Charlatans or Saviours?: Economists

and the British Economy from Marshall to Meade (1998), The British

Economy since 1945: Engaging with the Debate (2000) and (edited with Roger

Backhouse) Exemplary Economists: Introducing Twentieth-century

Economists (2 volumes, 2000).

References:

Castles, F.G. (1998) Comparative Public Policy: Patterns of Post-war

Transformation. Cheltenham: Edward Elgar.

Clark, C.G. (1945) “Public Finance and Changes in the Value of Money,”

Economic Journal, 55 (4), pp. 371-89.

Gemmell, N. (editor) (1993) The Growth of the Public Sector: Theories and

International Evidence. Aldershot: Edward Elgar.

Keynes, J.M. (1926) The End of Laissez-faire. London: Hogarth Press.

Reprinted in The Collected Writings of John Maynard Keynes. Vol. IX:

Essays in Persuasion. London: Macmillan (1972), pp. 272-94.

Steinmo, S. (1993) Taxation and Democracy: Swedish, British and American

Approaches to Financing the Modern State. New Haven: Yale University

Press.