TOPIC 4.3: Small vs Big Government

What is the role of government in stimulating the economy?

We often hear that government stands in the way of ‘business’, or is part of a ‘nanny state’ and without government interference, less regulation, society, the country, the economy would be better off.

What is a small government? Conversely, what is ‘big government’ and what political parties promote one over the other?  And, do the policies of those promoting small government actually result in reducing the size of government?

Queensland Senator Matt Canavan was a member of Cabinet in the Turnbull and Morrison Governments and Minister for Resources and Northern Australia from 2016 to 2020. In his maiden speech to the Senate on 16 July 2014 he called for more support for small, farmers, small business and families.^[1]

In his speech, Senator Canavan supported stronger competition laws, superannuation changes and income splitting, and he called for a “national productivity agenda”.

What is ‘big and small government’?

The size of government could be considered from an economic, politico-legal or philosophical perspective.

Typically, when people use the term ‘big government’, they are often describing a government that is physically large and expensive to run. For example, thinking about how ‘big’ government is in Australia we could compare different government spending as a percentage of the nation’s GDP.  International Monetary Fund data reveals that on average over the decade from 2011-2021 (latest available comparable data) total government expenditure in Australia was 38.5% of GDP.  This was more than the US (37.3%) the same as NZ (38.4%) but significantly less than Sweden (49.3%), Italy (51%) and France (57.3%). This might seem intuitively correct to us here in Australia as many US politicians are vocal about smaller government and many European countries are noted for their government funded generous welfare and pension systems. However, China the 2nd largest economy in the world and 10 times that of Australia’s, had average government expenditure of less than 32% of its GDP over the same period.  Some might argue that from an economic perspective, Australia has ‘bigger government’ than China.

From a political and philosophical perspective ‘big government’ is a term generally used in a pejorative manner by factions on the political right (or by those who believe in individual freedoms) to describe a government that is too intrusive in too many areas of individual citizens’ lives. This could include criticisms of governments that try to exercise too much control over business, but also includes criticisms of governments that aim to provide too much welfare, or are too prescriptive on preventative health issues, for example by trying to influence behaviour on smoking or eating.

Small government minimises its own activities. It is an important topic in libertarianism and classical liberalism.

According to financial commentator Michael Lewis (2022):^[2]

The debate about government scale began with the ‘economic rationalists’ who believe the market best determines the choices to be made in economic terms. The government of some countries believe in heavy involvement (e.g. China, Russia, and Japan) with centrally planned economies, others in more restrained involvement (US, Britain). The debate is important for public servants to understand firstly, because the efficiency of the public sector itself is a factor in international competitiveness; secondly, appropriate policy settings to support national competitiveness are required because markets are subject to global competition; and, thirdly, much of the pressure for public sector reform discussed in Module 6 is driven by the debate.

In the Australian context, the Coalition Government in 2014, in an attempt to create smaller government proposed to extract itself from health and education matters in favour of the States and Territories, to deregulate universities, and introduce a co-payment to Medicare.

These proposed changes were very controversial when announced and caused significant pushback from both the jurisdictions and various interest groups.

So, is government in Australia ‘big or small’?

One way to measure how big or small a government is to look at the size of government programs relative to the GDP of the nation. Despite the popular misconception that Australia taxes are very high by world standards, since the 1960’s total taxes paid by Australians to all levels of government have been below the average rate for countries in the Organisation for Economic Co-operation and Development (OECD, 2022).^[3] The OECD has 38 member countries including many comparable market-based democracies such as Canada, France, Germany, Italy, UK and USA. In more recent decades Australia has been general sitting around the bottom third of OECD countries for tax levels. The graph below illustrates Australia position as 10th lowest country for tax burden in 2020 and 2021.^[4]

Big or small government and industry assistance

When we talk about big or small government, the target is usually social expenditure and impediments for businesses, and these are often decried as being ‘unsustainable’ to the budget. However sometimes this welfare is targeted to business and is often called ‘corporate welfare’.

According to Margaret McKenzie of the School of Accounting, Economics and Finance at Deakin University^[5]:

According to the Productivity Commission, assistance to Australian industry was $13.8 billion in 2021-22 and increase of almost half a billion dollars on 2020-21. This is part of global trend of ‘overt industry policy’ with many large economies favouring selected domestic industries through subsidies, local content rules and trade barriers or as they put it ‘old-fashioned protectionism’. The Commission’s view is that it is in Australia’s interests as a small open economy to have global economic integration and low trade barriers (Productivity Commission 2023a).^[6] The graph below shows over 25 years of industry assistance from all levels and political persuasions of government.

Source: (Productivity Commission, 2023b, p13)^[7]

Comparing Australia to other countries in social expenditure

A refrain across many OECD countries is that with the people living longer, public spending on the age pension and associated benefits has been too high and is unsustainable as a % of GDP. Many OECD countries have been progressively raising the pension age with the 2021 average OECD pension age of 64 years predicted to rise to 66 years by the mid 2060’s (OECD 2021).^[8] Australia has moved faster than most OECD countries with the current pension age now 67 following reforms by the Rudd and Gillard Labor governments in 2010. Later plans by the Abbott and Morrison Coalition governments to raise the age to 70 were abandoned (Chomik, 2018).^[9]

According to the OECD, public expenditure on age pensions and associated benefits in 2019 (latest comparable data set) was 4.3% of GDP in Australia, 7.0% in Sweden, 7.1% in the US, and 13.5% in France. (OECD, 2023).^[10] In 2009 Sweden was spending 1.2% of GDP more of public funds than the US however they have since started to raise retirement ages and plans to link them to life expectancy from 2026 (OECD 2021).