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Government and economic growth: Does size matter?

4.3  Composition of expenditure in New Zealand

Sections 2 and 3 highlighted that the impact of the level of expenditure on economic growth will depend on the mix of the expenditure. While this section provides some “top-down' analyses of the composition of expenditure in New Zealand, there are significant limits on the extent to which conclusions can be drawn on composition from such analysis. Therefore, this section aims to raise questions for further exploration rather than provide definitive answers.

4.3.1  Economic classification

One approach to analyse composition is to break down government expenditure according to an economic classification, which distinguishes between investment (gross fixed capital formation), government consumption and transfer payments. Figure 11 shows that New Zealand's composition is not out of line with other OECD countries in terms of broad economic classifications. We tend to spend a similar share of expenditure on government investment and consumption but slightly less on the less ‘productive' transfers (see section 3.2.2).

Figure 11 – Government expenditure by economic classification, percent of total expenditure
Figure 11 – Government expenditure by economic classification, percent of total expenditure   .

One approach to drilling a bit further down into the economic classification is to look at the extent to which expenditure funds public goods, which benefit most people, or goods and services with largely individual benefits. Government consumption expenditure is defined as providing individual benefits where the acquisition of the good or service by an individual or household precludes its use by other individuals or households and brings little or no benefit to the rest of the community.[15]

The New Zealand government's share of collective or public consumption within total consumption is around the OECD average (see Figure 12). However, at only around 40% of total consumption, there is still a significant proportion of expenditure in areas with mostly individual benefits. While some of this expenditure may be in growth-enhancing areas, it is possible that it is ‘crowding out' private sector expenditure and there may be scope for greater targeting of this type of consumption expenditure. It is interesting that there is much greater variance in individual than public consumption across countries, with New Zealand's government spending around 6 percentage points more of GDP on ‘private' consumption than Mexico's, the lowest spender in the OECD.

Figure 12 – Collective and private consumption
Figure 12 – Collective and private consumption   .

Notes

  • [15]By convention, under System of National Accounts methodology, all government final consumption expenditures on education, health, social security and welfare, sport and recreation and culture are treated as expenditures on individual services, with the exception of expenditure on general administration, regulation, research etc.
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