Europe shows the end game for big government

Published in Online Opinion (Fortitude Valley), 21 December 2010

If you want to understand the European crisis, you only need two statistics. The first is the development of the ratio of government expenditure to GDP over time; the second is the level of government debt.

Half a century ago, the state accounted for around a third of the economy in most EU countries. It was highest in Austria at 35.7 per cent of GDP. In Italy, Belgium and Sweden, it was just over the 30 per cent mark; in Switzerland and Spain, it was even lower than 20 per cent.

What has happened since then can only be described as an explosion of government activities. In today’s European Union, there is not a single country with a government expenditure to GDP ratio below 40 per cent. Ratios in the mid-40s are the norm, and in some countries they are well above the 50 per cent mark. In Britain, it now stands at 52.2 per cent, in France at 55.9 per cent, and in Sweden at 56.0 per cent.

Such expenditure levels require enormous tax revenues, and finance ministers found raising them to be increasingly difficult. So instead they went into debt. According to the latest available data from the European Central Bank, general government debt in Eurozone countries stood at 79.2 per cent of GDP last year. The financial crisis of the past years has obviously contributed to this, but Europe’s march into debt began decades earlier.

What we are witnessing today is the end game of the European welfare state model as described above. Of course, there are further complications such as Europe’s demographic change, its failed migration and integration policies, and the folly of uniting the diverse continent in a monetary union. But above all, the European crisis boils down to the crisis of the overblown, inflated state.

For this reason alone, Australians should closely watch what is happening in Europe. Europe’s present can be our future if we repeat the mistakes Europeans have made in the past.

In comparison to the European figures, Australia’s expenditure to GDP ratio was 21.2 per cent in 1960, had climbed to just over 34 per cent by 1980, roughly stabilising at that level since. Consequently, Australian government debt is minimal by international standards.

Arguably, the smaller state has contributed to the higher growth rates that Australia has generated. As a rule of thumb, an increase in the spending ratio of 10 percentage points reduces economic growth by just under 1 percentage point a year. This may not sound much, but over the years the compound effect is substantial.

By comparing the different economic conditions of Europe and Australia, it should not be too difficult for Australians to make a choice about economic policy. Mimicking European policies is the surest way to economic disaster.

This makes it all the more surprising why the Australian government seems hell-bent on doing just that. “Building the Education Revolution”, “Cash for Clunkers”, the “National Broadband Network”, and the universal parental leave scheme are all steps on the way to a bigger government Australia.

A quick glance at Europe shows why this is a dead end path.

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