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Government and economic growth: Does size matter?

4.2  Size of government in New Zealand

4.2.1  International comparisons

This section provides comparisons of total expenditure and revenue with OECD countries, as well as wider international comparisons of public consumption.

Total expenditure and revenue

New Zealand typically compares itself with other OECD countries, which tend to have closer income levels to New Zealand than countries outside this group. Given that government size tends to grow with income, it is arguably more meaningful to make comparisons with countries of a similar income level. More pragmatically, comparisons of total expenditure and revenue are available only for a sub-set of countries outside the OECD.

The latest available actual OECD data shows that New Zealand's government is broadly in line with the OECD average in terms of expenditure and revenue as a share of GDP. At 40% of GDP in 2007, New Zealand's general government expenditure was slightly lower than the average of 42% for the 29 OECD countries for which data is available (see Figure 5). Reflecting the operating surplus New Zealand was still running in 2007, New Zealand collected a slightly higher share of revenue than the OECD average in 2007 (see Figure 6).

Figure 5 – General government expenditure, as a percent of GDP
Figure 5 – General government expenditure, as a percent of GDP   .
Figure 6 - General government revenue, as a percent of GDP
Figure 6 - General government revenue, as a percent of GDP   .

However, the size of New Zealand's government is still significantly higher than the bottom of the OECD range, which is around 30% of GDP, depending on whether it is measured by expenditure or revenue. A number of countries have smaller governments than New Zealand, including Australia and South Korea, with the larger governments generally being European.

Public consumption

An alternative way to measure ‘size' of government is public consumption, which excludes expenditure on capital, transfers and debt servicing, to provide a measure of government expenditure on providing goods and services. This gives a better measure of the contribution of government to current economic activity or Gross Domestic Product (GDP). Looking at public consumption also allows us to expand our comparisons beyond OECD countries, using World Bank datasets. However, information is also often only available at central government levels for many developing countries.

Figure 7 shows that New Zealand also rates slightly lower than the OECD average on measures of public consumption as a percent of GDP, with governments beyond the OECD being significantly smaller (see the line in Figure 7). However, differences are much bigger when comparisons are made on a per capita, rather than on a GDP, basis, reflecting the lower incomes of these countries (see the bars in Figure 7).[13] In a similar fashion, though New Zealand's public consumption is around the OECD average as a percent of GDP, it is relatively smaller on a per capita basis. Though the percent of GDP comparison may be more meaningful for considering the impact on economic growth, this measure can mask real differences in the purchasing capability of governments from variations in income levels. The 2025 Taskforce (2010) highlighted that there are pressures for countries, where average incomes are rising relatively slowly, to keep pace with standards of service provision in ‘comparable' countries that may not be affordable.

Figure 7 - Government consumption, share of OECD average and percent of GDP
Figure 7 - Government consumption, share of OECD average and percent of GDP   .

Notes

  • [13]Note that the per capita measures are provided on a USD and a purchasing power parity (PPP) basis (using a 2005 reference year), which takes account of differences in price levels across countries. While PPP is a better measure, it does not adjust for the substitution effects caused by differences in relative prices across countries. In particular, as a consequence of relative cheaper labour in developing countries, their governments will tend to use relatively more labour than capital. This means that though exchange rate-adjusted measures tend to under-estimate the size of government, PPP tends to over-estimate it. However, they are probably closer to the “true” measure than exchange rate measure.
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