MEASURING PUBLIC SECTOR SIZE

WHAT OR WHO IS THE GOVERNMENT?

FOCUS QUESTIONS
1. What are the principal activities of government?
2. What does government spend its money on? How have these
expenditure patterns changed over time, and how do they
compare across countries? Which expenditures occur at the
national level, and which at the state and local level?
3. How does the government finance its expenditures? How do
the sources of tax revenues diff er between the national
government and state and local governments? How have they
changed over time?
What distinguishes the institutions that we have labeled as
“government” from private institutions?

• First, in a democracy the individuals who are responsible for running public
institutions are elected, Or are appointed by someone who is elected . The
“legitimacy” of the person holding the position is derived directly or indirectly
from the electoral process.
• Second, the government is endowed with certain rights of compulsion that
private institutions do not have. The government has the right to force you to pay
taxes (and if you fail, it can confi state your property and/ or imprison you). The
government has the right to seize your property for public use provided it pays
you just compensation (this is called the right of eminent domain).
TYPES OF GOVERNMENT ACTIVITY

• the activities of government fall into four categories:

1. The production of goods and services

2. The regulation and subsidization or taxation of private production;
3. the purchase of goods and services, from missiles to the services of street
cleaners;
4. the redistribution of income—that is, payments like unemployment benefits to
particular groups of individuals that enable them to spend more than they could
otherwise. Payments that transfer money from one individual to another—but not
in return for the provision of goods or services—are called transfer payments.
 HOW BIG SHOULD GOVERNMENT BE?

• How much government—how much tax burden, how much in the way of services, how much
borrowing—is “enough”? This question goes beyond the kinds of taxes used and the kinds of
spending decisions made, or the mix of revenue sources and outlays, to the issue of overall size.

There are various ways to measure how much government is enough. :

1. The level of satisfaction of the representative citizen with his or her tax burdens relative to services received. If
the marginal value of the last unit of government services is just equal to the pain of parting with the last few
dollars of tax money to pay for that service, then the level of government activity is optimal. However, there is
no good way to make such measurements.
2. how fast government is growing, absolutely and relative to population and/or GDP (share of GDP) -
government consuming / GDP
3. To compare the size of our government, per capita or as a share of GDP, to the size of government in other
nations, especially other nations at similar levels of economic development. (international comparison). A
valuable indicator of the size of government is its rank relative to other nations of a similar level of income and
wealth.
WHAT MAKES GOVERNMENT GROW?

• Citizen expectations
• Driven by bureaucracy
• Elastic revenue sources The automatic growth of revenues, keyed to the growth of the
tax base (income, spending, and wealth), could lead to an automatic and uncontrolled
growth of the public sector without a conscious decision about how much of economic
activity citizens want to have run through or managed by government
• Fees for services Increasingly, governments at all levels, but especially state and local,
have shifted some of the responsibility of paying for government services to those who
benefi t directly from those services
• Lack of a budget constraint
SUMMARY
• The size of government is measured by revenue, spending, defi cits, and debt. In order to make
comparisons between time periods, or between states, cities, and countries, data can be adjusted by
correcting for infl ation, dividing by population (per capita), and/or expressing revenue or spending
relative to GDP or personal income. Federal revenue and spending are presented in both the budget and
the trust funds, which are called the unified budget when they are combined. Reported defi cits usually
refer to the unified budget.
• Total federal revenue has been growing at about the same rate as personal income, more slowly if the
trust funds are not included. Federal revenue as a share of GDP has been relatively stable over the past
50 years. The individual income tax and social security taxes are the main sources of federal revenue.
• Major categories of federal spending are national defense, human resources, physical resources, interest
on debt, and other. The composition of federal spending has changed, with a decline in the share of
defense spending more than offset by transfer payments. Defi cits in most years of the past half-century
have resulted in growth in the national debt. 2
• State and local governments have a very different mix of revenue sources and
spending obligations. States rely heavily on income and sales taxes, local
governments on property taxes and state aid, and both on fees and charges of various
kinds. Education and welfare are the main spending categories, along with health and
hospitals, highways, and law enforcement and corrections.

• There is no simple way to measure the “right” size of government. Reasons why
government might grow rapidly include citizen demand, bureaucracy behavior, elastic
revenue sources, increased use of fees and charges, and at the federal level, lack of an
effective budget constraint. Indicators include how fast government is growing,
absolutely and relative to population and/or GDP, or comparisons of the size of our
government among nations at similar levels of economic development.