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Factors Influencing Public Spending Growth in the XX Century

Explore the reasons behind the expansion of public sector spending, including post-war effects, welfare state rise, ideological shifts, demographics, demand and supply of public services, hypotheses, special interest groups, and stages of economic development.

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Factors Influencing Public Spending Growth in the XX Century

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  1. Topic1 Why has publicspendinggrownduringthe XX century?

  2. XIX c “Post-war” “1980s reforms” WW1 WW2 https://ourworldindata.org/public-spending

  3. Somereasonsthathavebeengivenfortheexpansion of public sector spending • Ratcheteffects of crises - war / recessions • Therise of theWelfareState • Shifts in ideology • Demandsfromworkingclass (social movements / therightto vote) • Demographics • Demand and supply of publicservices • Wagner’shypothesis • Baumol’shypothesis • Publicchoicetheory • “Fiscal illusion” of voters • Specialinterestgroups • Stages of economicdevelopment

  4. Total war- mobilization of civilians

  5. Great Depression (& New Deal)

  6. Shiftingideology • XIX century – • Imperialist • Laissez-faire / limitedstatefunction in theeconomy • XX century • “Keynesian” (in favour of more stateintervention in theeconomy) • Rules-basedinternationalorder (Bretton-Woods / GATT) • After 1980s • Neo-classicaleconomics • EuropeanCommunity (free markets / migration / capital) • Shifttowardslessstateintervention in theeconomy • Now • Populist&Authoritarian?? Opportunistic, transactional, “cronycapitalism”

  7. Working-class social movements

  8. Suffrage (rightto vote) • Spain: • Males 1812 • Females 1933 • Suspended 1939-1978 • (Your country)… • https://en.wikipedia.org/wiki/Suffrage

  9. Demandfor social insuranceafterSecondWorldWar

  10. Welfarestate: social spending as % of GDP

  11. Welfarestate: Demographics • More olderpeople in absoluteterms and as % of total population • Healthcare • Pensions

  12. Demand and supply of publicservices • Wagner’shypothesis • Demandforpublicservices (especiallyhealth, education) growsfasterthangrowth in incomes • People are willingtopayincreasinglyhighertaxesorcontributionstoobtaintheseservices • Baumol’shypothesis • Thecost of services (such as health and education) increasesfasterthanthecost of producing industrial goods

  13. Publicchoicetheory • “Fiscal illusion”? • The median voterseesthebenefits of publicspendingbutdoesnotpaythetaxationcost • Specialinterest / lobby groups (protecionism) • Doctors (seeTheIndependent, 28 June 2008) • Farmers (agricultural subsidies) • Big Business (importtariffs & R&D subsidies)

  14. Stages of development? • Industrialisedeconomy (Mainlyprivate sector) (Mixedeconomy) GDP per capita WelfareState Poor, undeveloped Size of public sector as % of GDP

  15. Stages of development?

  16. Isthewelfarestatebeingrolled back? • Neo-liberal counter-ideology • “Roll back thestate” • Reduce taxation • Remove incentives “nottowork” • Improveefficiency of publicservices • Reduce political and economicpower of worker’sunions • Liberalisemarkets • De-regulatebanking sector • End of goldstandard and capital controls

  17. How do wemeasurethesize of thestate? • Publicadministration: civil servants, judiciary, military, etc • Public sector organisations (schools, hospitals, etc) • Regulatedenterprises (notformallyownedbystate/ partiallyowned) • Private-sector contractors (e.g. Carillion PLC in the UK) • “Off-balance-sheet” activity • (seeeconomistarticle “WheredidCarilliongowrong?” Jan 18th 2019)

  18. References • “TheBirth of the NHS” TheIndependent 28 June 2008 https://www.independent.co.uk/life-style/health-and-families/features/the-birth-of-the-nhs-856091.html • “WheredidCarilliongowrong” TheEconomist 18 Jan 2018 • IMF World Economic Outlook May 2000 Chapter 5 THE WORLD ECONOMY IN THE TWENTIETH CENTURY, STRIKING DEVELOPMENTS AND POLICY LESSONS. Pages 171-178 (The Changing Role of the Public Sector) https://www.elibrary.imf.org/view/IMF081/07998-9781557759368/07998-9781557759368/ch05.xml?lang=en&redirect=true

  19. Questions • “The advantages of competitive markets in raising economic efficiency and stimulating innovation are now generally recognized. The essential role for the government is to create conditions that allow markets to develop, to function orderly and efficiently” • Arguments FOR and AGAINST the proposition • The significant increase in the ratio of government expenditure to total output is (apart from the relative price (Baumol) effect) mainly accounted for by the emergence of the government as provider of social insurance and its effort to redistribute income through the tax/transfer system. • Explain and critically examine the affirmation

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