Questioning the quotas

OK, I know that not everyone has studied economics, so let's start with a definition. Every country has a national quota, which is the ratio of its total government spending relative to its gross domestic product (GDP).

The national quota indicates how much macroeconomic output is used by the public sector. In Germany, for example, it's 45 percent, in France it's 56.7 percent (and 49.1 percent in the Eurozone as a whole), 45.7 percent in the UK, 39.6 percent in the US, and 32.9 percent in Switzerland. In theory, a government quota of 0 percent would indicate that there's no state activity whatsoever, whereas with a government quota of 100 percent any private economic activity would be prevented.

High national quotas are generally associated with restrictions in individual citizens' economic freedom, which is particularly worrying to free marketeers. liberal forces. In addition, there are fears that high quotas negatively impact economic growth, because individuals are thought to allocate financial resources more productively than state institutions. However, we have yet to produce a study to prove that there indeed exists a negative correlation between high national quotas and low GDP growth.

Digging into the data

Looking at the available data and its foundations, it's no surprise that there have yet to be any clear conclusions about the relationship between GDP growth and the national quota.

Any GDP figure is highly aggregated and based on lots of assumptions. It is only partially standardised internationally, and is certainly not an exact representation of the real economic activity in any country. Considerations of productivity also take a back seat. For example, passing a law that would, say, force construction teams to dig ditches and backfill them every day throughout the year would increase GDP - notwithstanding the absurdity of such an action. In addition, only income and expenditure flows are taken into account, while assets and liabilities are not.

The calculation of the national quota is similarly vague. Generally, government accounting and the overall management of public finances are based on the principle of a “reduced free cash flow” method, which requires neither the accrual of cash flows nor the keeping of balance sheets. An increase in debt is treated as revenue and an investment as expenditure.

When calculating the national quota, current government consumption and investments that will only pay off in the future are mixed together indiscriminately. It is also often forgotten that higher government spending in one period does not necessarily lead to an increase in taxes at the same time - and thus to a reduction in private individuals' freedom to spend and generate growth.

Higher spending in the form of investments and public expenses can also be financed with debt, and only burdens a nation's taxpayers and GDP growth in the future. Reducing the state quota merely by decreasing the state's capital expenditure could equally put a strain on GDP growth. Today's statistics are therefore unsuitable for drawing any clear conclusions about the national quota and economic growth, because they ignore basic economic relationships.

Managing for impact

A better and more useful goal would be to find out whether a country is being economically well-managed. To achieve this, its turnover, cash flow and balance sheet would have to be related to the overall economic turnover, cash flow and capital stock - hence adding a balance sheet view.

Policymakers should also ask themselves a number of important questions. Is the state's cash flow positive, and are we using its assets productively and professionally? Are we maintaining (or increasing) the value of the state's assets through our investments? Are our good governance standards strong enough? Is overall net worth and state equity increasing? Similarly, policymakers should be reporting openly and transparently according to internationally valid accounting standards.

Hardly any government can answer these questions at the moment, although most states are obliged in law to do so. In theory, a state with high but well-managed government spending, which is correctly calculated and includes accruals and balance sheet, would not necessarily inhibit growth.

But since state effectiveness is not calculated in such a holistic way, it is widely assumed - in the absence of proof to the contrary - that state-used resources are less effective in stimulating growth than those used for private purposes.

FURTHER READING

• From growing pains to growing gains. While governments and businesses are united by their mutual hunt for prosperity and wellbeing, how to achieve it remains an enduring challenge. Enrique Rueda-Sabater examines the available options
• The financial gateway to greater wellbeing. Douglas Beal is in no doubt: greater financial inclusion can lead to a step-change in the well-being of citizens the world over
• Why wellbeing works. With global growth continuing to fluctuate, governments are looking at other ways to track and strengthen social and economic performance. Michael Spence explains why policymakers are increasingly agreeing on wellbeing
• Accounting for better government impact. Philipp Weckherlin explains why introducing modern financial management techniques into government is well worth the effort
• Bringing financial management to the fore. Few understand the complexities of financial management in government better than Ian Ball. He tells Adrian Brown about delivering radical reform in his native New Zealand and the enduring importance of new international public-sector accounting standards.
• Waste not, want not. Although the US government loses more than $100 billion in improper payments every year, these are not always the products of waste, fraud or abuse, explains former IRS chief Danny Werfel
• Accounting for value. Jeremy Nicholls tells us why a fundamental reassessment of ‘value' is the starting point for better decisions and then better citizen outcomes