08/08/2005 10:17:02 am
Reduction of the Size of the State - Desirable and Possible. In the Financial Times a few days ago, Ludger Schuknecht and Vito Tanzi wrote about reform in Wetsren Europe:

"Fiscal policies in the postwar period were rather successful in many countries. Good public administration, health and education services, infrastructure and basic social assistance supported an environment of equal opportunity, high growth and social cohesion. This was achieved with public spending averaging not more than 30 per cent of gross domestic product.

Afterwards, public spending went up significantly to average more than 40per cent of GDP in the early 1980s. In many countries, public spending rose even further and peaked above 50 per cent or even 60 per cent of GDP at some point during the past 20 years. But this increased expenditure brought few additional socio-economic benefits. Moreover, rising spending and taxation have been strongly correlated with declining growth, investment and employment.

A number of countries started big reforms of expenditure programmes. In Ireland, New Zealand, Canada, the Netherlands, Belgium and Finland, public spending reductions exceeded 10 per cent of GDP. In a few others it declined by between 5 and 10 per cent. The size of bureaucracies was reduced, services were privatised and early retirement and other welfare programmes made more balanced. ...

All the reforming countries enjoyed significant economic benefits. ... Economic growth steadily increased. ... Reforming countries experienced notable increases in employment. ... In fact, in the past 20 years, income growth for the poorest fifth of the population was highest in those countries that started early with ambitious reforms."