TABLE A-6.-GOVERNMENT SPENDING AS PERCENT OF GROSS DOMESTIC PRODUCT-Continued

Y-Gross domestic product.

G-All current disbursements of general government.

G.-Government final consumption expenditure.

G-Transfer outlays (all current disbursements other than government consumption).

REFERENCES

1. Andic, S. and J. Veverka, "The Growth of Government Expenditure in Germany since the Unification," Finanzarchiv, N. F., Band 23, Heft 2 (January 1964).

2. Baumol, W. J., "Macroeconomics of Unbalanced Growth: the Anatomy of Urban Crisis," American Economic Review, LVII (June 1967).

3.

17), 1975.

and W. H. Oates, "The Theory of Environmental Policy" (Chapter

4. Beck, M., "The Expanding Public Sector: Some Contrary Evidence," National Tax Journal (March 1976).

5.

"Inflation, Government Spending, and Real Size of the Public Sector," Atlantic Economic Journal (September 1979).

6.

"Estimating Changes in Real Size of the Public Sector," Economics Letters (1979 forthcoming).

7. Gupta, S. B., "Public Expenditure and Economic Development-a CrossSection Analysis," Finanzarchiv, N. F., Band 27 (October 1968).

8. Holmans, A. E., "The Growth of Public Expenditure in the United Kingdom since 1950," Manchester School of Economic and Social Studies, (December 1968).

9. Organization for Economic Cooperation and Development, "Public Expenditure Trends" (Studies in Resource Allocation, no. 5), 1978.

10. Peacock, A. T., "The Expanding Public Sector," (mimeo.), November 1978. and J. Wiseman, "Approaches to the Analysis of Public Expenditure Growth," Public Finance Quarterly, (January 1979).

11.

12.

"The Growth of Public Expenditure in the United Kingdom, 18901955" (London: George Allen & Unwin, 1967).

13. Pluta, J. E., "Wagner's Law, Public Sector Patterns, and Growth of Public Enterprises in Taiwan," Public Finance Quarterly (January 1979).

14. Tussing, A. D. and J. A. Henning, "Long-Run Growth of Non-Defense Government Expenditures in the United States,' Public Finance Quarterly (April 1974).

15. United Nations Statistical Office, Yearbook of National Accounts Statistics, 1964 and 1977.

16. United States Department of Commerce, "The National Income and Product Accounts of the United States 1929-1974" (Washington, D.C.: Government Printing Office, 1976).

17. United States Office of Management and Budget, "The Budget in Constant Dollars," Technical Paper Series BRD/FAB 75-1. (Washington, D.C.: Executive Office of the President, 1975).

18. Veverka, J., "The Growth of Government Expenditure in the United Kingdom since 1790," in A. T. Peacock and D. J. Robertson (eds.), “Public Expenditure: Appraisal and Control" (Edinburgh; Oliver & Boyd, 1963).

19. Wagner, R. E. and W. E. Weber, "Wagner's Law, Fiscal Institutions, and the Growth of Government," National Tax Journal (March 1977).

Public Information Office,

Newark Campus of Rutgers University.

For Release: 12:30 P.M., Friday, Oct. 12, 1979.

PUBLIC Expenditures Slowing Down, Rutgers Expert Reports

Contrary to popular belief, government spending in the United States is no longer growing as rapidly as in the 1950's and 1960's, Dr. Morris Beck, professor of economics at Rutgers University in Newark, said today.

Dr. Beck addressed the annual conference of the Atlantic Economic Society at the Hyatt Regency Hotel in Washington, D.C.

The Rutgers professor has developed a "deflator" for total public spending, and has applied it in the research reported on today.

His study is believed to represent a scientific breakthrough in public-expenditure analysis. Previous studies of the public sector had to rely on partial deflators, such as the United States Commerce Department's "implicit price deflator for government purchases of goods and services."

From an annual rate of 5.1 percent in the 1950's and 5.8 percent in the 1960's, the real growth rate dropped to 3.1 percent from 1970 to 1977, Dr. Beck noted. He said that total government spending in the United States amounted to $684 billion in 1978, nearly seven times the 1953 total. Expressed in 1953 dollars, the 1978 total becomes $238 billion, an increase of 135 percent over 1953. The annual spending growth rate over the period was 3.5 percent.

The behavior of total government spending, in real terms, stands in sharp contrast to the 7.9 percent growth rate of nominal expenditure, Dr. Beck declared. The growth rate of real expenditure was only slightly higher than the 3.3 percent growth of real gross national product. Hence, the real size of the public sector, measured by the ratio of real expenditure to real GNP, grew only one percentage point from 28 percent in 1953 to 29 percent in 1978, according to Dr. Beck.

"By means of weights, one may derive a deflator for total government spending a price or cost index for all government outlays," Dr. Beck said. "For 1978, the value of the deflator (1953=100) is 287.0, and the compound annual increase for the period is 4.3 percent."

A surprising result turned up by the study is that the pay index (deflator) for government employees rose at a lower annual rate (4.5 percent) than the cost index for government purchases from private firms (5.2 percent).

Dr. Beck's study is the first systematic attempt to obtain a deflator that can be used to measure changes in real size of total public-sector spending.

As a proportion of the gross domestic product, United States public expenditure, at all levels of government, rose from 20 percent in 1950 to 33 percent in 1977. Size of the public sector is normally represented by these percentages, Dr. Beck said, which do not take into account different inflation rates.

Dr. Beck's study emphasizes the distinction between two types of government spending: expenditures for collective consumption, which rose at an annual rate of 3.8 percent over the period covered by his study, and government-transfer payments, which rose at a 6 percent annual rate. Both percentages, Dr. Beck said, measure real growth.

Hence, he said, nearly all of the increases in real size of the public sector is accounted for by the growth of transfer payments, which go to selected beneficiaries of transfer programs. Government spending for general services accounted for about 1 percentage point (from 12.1 percent in 1950 to 13.4 percent in 1977) of the increase.

Dr. Beck's report was based on his study, "Public Expenditure in the Mature Economy," to be completed in 1980. A preliminary report was given today and will be published in Public Finance, the journal of the International Institute of Public Finance.

The United States' experience is similar to that of 13 industrial nations, where real size of the public sector increased from 21 percent in 1950 to 34 percent in 1977, and where transfer outlays accounted for nearly all of the increase, Dr. Beck reported.

Growth rates were calculated from real expenditure by all levels of government in these countries. "Real" means that the amounts spent in each year were deflated-adjusted for price and cost increases.

ESTIMATING CHANGES IN REAL SIZE OF THE PUBLIC SECTOR

Morris BECK *

Rutgers, The State University of New Jersey, Newark, NJ 07102, USA

Received 27 April 1979

A new deflator for total government expenditure can now be derived from major components of the total. Applied to government spending in the US over the past quarter-century, results show near-stability in real size of the public sector.

1. Introduction

Empirical studies of public expenditure, in the United States and elsewhere, have long been hampered by the absence of a deflator for total government spending. This gap in the national accounts has meant that over-all size of the public sector can be expressed only in nominal terms, unadjusted for relative price effects. The behavior of real expenditure for government consumption can readily be traced from published sources, but changes in real size of the public sector must reflect also changes in the real value of government transfer payments. This paper describes an attempt to construct a price (cost) index for total government spending, and applies the results to the US public sector, 1953-78.

2. Characteristics of the conventional measure

1

The most widely used measure of public-sector size is a simple ratio of total government spending to GNP. An excellent point of departure, this ratio suffers from two major deficiencies:

(1) It fails to distinguish between expenditures which do, and those which do not, involve the direct use of resources by government, and

1

The author is grateful to the Rutgers University Research Council for support of his project 'Behavior of public expenditures in the mature economy'.

In this paper 'total government expenditure' is the amount reported in the Commerce Department's national income accounts. A variant, 'total current disbursements of general government', is the concept of choice for cross-national comparisons.

(2) it fails to take account of the impact of inflation on government's ability to provide public services.

The first defect is serious because transfer payments now represent more than half of total government expenditure in most industrial countries. In the United States the transfer component accounts for more than a third of the total, in nominal terms, and nearly half the total in real terms. More later about the dramatic growth in the relative importance of government transfer payments.

The second shortcoming has long been recognized by public finance specialists, but few have attempted to develop a real counterpart to the nominal measure of public-sector size. A common assumption of these studies is that the two terms of the ratio are equally affected by inflation. In a forthcoming article (1979) Peacock and Wiseman now recognize that 'separate deflation can make a considerable difference'. Their study of British public expenditure [Peacock and Wiseman (1967)] has had enormous influence on fiscal theory, as well as empirical investigation of government spending.

Between 1953 and 1978 total government expenditure in the United States rose from $102 billion (27.8% of GNP) to $684 billion (32.5% of GNP), an increase of nearly sixfold (line 5). The compound annual rate of increase was 7.9%, but in real terms the growth rate was 3.5% (line 10). Behavior of total government spending in real terms is analyzed in a later section of this paper.

3. Declining importance of government consumption expenditure

Nearly two-thirds of the total in 1978 - down from four-fifths in 1953 - involve the flow of resources to government. These inputs consist of employee services and purchases from private firms. The functions supported by these outlays are intended to serve the general public, while transfer programs are designed to serve individuals who qualify for program benefits.

Over the quarter-century resource-absorbing outlays grew at an annual rate of 6.9%, somewhat below the nominal growth rate of GNP - 7.3%. Hence, even in nominal terms, the proportion of GNP represented by these outlays fell from 22.5% in 1953 to 20.6% in 1978. The latter becomes 16.4% when the proportion is derived from deflated values. In real terms, that is, the proportion of GNP representing services to the general public declined markedly over the period. In current dollars these outlays rose more than fourfold over the period - from $83 to $434 billion (line 1). Expressed in 1953 dollars, however, the 1978 value of these outlays becomes $133 billion; that is, the increase in real terms is 62% and the annual growth rate is 1.9% (line 6).

Of the $352 billion increase in resource-absorbing outlays, only $51 billion (15%) represents an increase in the physical volume of inputs; the remainder, $301 billion (85%) is attributable to a rise in unit costs. The implicit price deflator for

1

Table 1

Growth of government spending in the United States, 1953-1978 (dollar amounts in billions). a

a Source: U.S. Department of Commerce, Survey of Current Business, January 1979, and The National Income and Product Accounts of the United States, 1929-1974.

these outlays rose by 225%, or at an annual rate of 4.8% over the period (line 11). The annual rate of increase in cost of goods purchased from private firms - 5.2% — was significantly higher than the annual growth rate of employee compensation 4.5%.

Stated differently, although government more than quadrupled its purchases. from the private sector, 95% of the increase in outlay represented higher prices, and only 5% represented larger volume. For employee compensation the corresponding percentages were 78 and 22. In both cases, higher prices may reflect improvements in quality, but a deflator based on current-year weights does not permit isolation of these elements. 2

2 The Commerce Department now publishes a 'fixed-weighted price index' for total GNP, but not for its components. An index of this type for government purchases would facilitate analysis of changes in public-sector size.