SA government consumption expenditure

[Garth Zietsman]

I was playing with Economic Freedom of the World data sets and developed a regression equation predicting government consumption expenditure as a percentage of GDP.  Better RoL, higher defense spending, bigger transfer programs and lower national IQs, all make for higher government consumption.

Well after accounting for those factors it seems SAs government consumption is on the high side by international standards - about 10% too high.  Government consumption that much higher than expected should have been accompanied by RoL standards on the level of USA, Belgium or Spain.

Furthermore it seems that with current levels of SA's RoL, transfers, defense and IQ best practice would reduce government consumption by 42% and tax by 31%.  Just meeting expected standards i.e. average, would reduce tax by 7.5% or 9 days off Tax Freedom Day or 4% more after tax income.  Best practice would mean 17% more after tax income.

We are being short changed by our government's excess inefficiency.

Garth

[Colin Phillips]

Sorry, Garth, what's RoL?

I googled it, this was my first result:

http://www.dieworsrol.co.za/

.c.

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[Garth Zietsman]

RoL is Rule of Law Colin.

[Leon Louw (gmail)]

I've noticed anecdotally over many years that richer countries have bigger governments (share of GDP by various measures).

This, I assume, has quite complex determinants, one of the biggest being size of the unrecorded ("informal") sector.

Early on I pointed this out to EFW folk, and said there should be some way to correct for this.  A possibility might be to index countries in some way.

Anyhow, I suspect -- if that still holds years later -- you would need to adjust for it.  That would make it worse for SA.  Were you to compare SA with other countries at the same stage of development, we might have a much higher CE than our peers.

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[Garth Zietsman]

That's right Leon.  The government size GDP connection is clear and strong but when one enters GDP and Rule of Law into the regression together then the effect of GDP vanishes.  This means that THE reason why richer countries have bigger governments is because richer countries spend a higher proportion of GDP on providing Rule of Law.  Every extra point on Area II (Rule of Law) of EFW seems to require an extra 1.83% more GDP spent on government consumption (a once off rise in level).  Better Rule of Law is a major factor in higher growth rates.  Each extra point in Area II is worth an extra 87.6% of initial GDP than otherwise at the end of 30 years.  Not bad for a 54.9% of initial GDP (1.83% times 30 years).  That's a return of 77 times investment over the 30 years. [That is an average result.  Worst practice may see a loss and best practice a much higher return.  See last paragraph.]

National IQ, transfers and defense spending do not remove the effect of GDP on government size much, so they are not important factors in the GDP-govt size conection.  They are instead independent explanations of government size.

You might be interested to know that given what it does, and the IQ it has to work with, the US government is pretty close to best practice in terms of low consuption expenditure - nearly 8.6% less of GDP spent on government consumption than expected.  Worst practice are Southern Africa (almost all much worst than SA) in general (about 5% more GDP consumed by government than expected) and parts of the Middle East.  By not delivering the quality of Rule of Law commensurate with our surplus government consumption the average SA citizen will have earned 39.2 times his current annual income over the next 30 years, instead of 41.4 times his current annual income.  He will have lost the equivalent of 2.23 years of his current annual spending power over the next 30 years.  Our GDP per capita growth rate should be 1.9% and not the current 1.6%.  Alternatively we could save about 6.5 months of the average person's current annual spending power for him (in less government consumption) over the next 30 years.  Personally I'd prefer the 2.23 year's income gift over the 6.5 month's income gift.  In aggregate money terms that's R7.359 trillion and R1.815 trillion respectively.  Not delivering the Rule of Law SA's government should (given it's tasks, talent and pay) cost us dearly.

Garth

Incidentally it's not only richer countries that have larger governments but freer countries too, and for the same reason - better Rule of Law.