When our governments tell us (as they have these past few years) that they will right our economy by spending gobs of money and buy us out of our economic downturn, we must realize that it all comes at a cost. Bigger government and increased public sector activities have a direct impact on a society’s ability to grow its economy. There is a direct co-relation between bigger government and smaller economic growth.
In an article entitled Big Government Impoverishes Us All, Michel Kelly-Gagnon of the Montreal Economic Institute concludes that “high levels of spending, usually presented as positive for the economy, also have the long-term effect of lowering economic growth.”
The bigger government becomes, the more its productivity decreases. Resources get lost in a maze of bureaucratic structures. Capital is crowded out of the private sector in order to finance public projects that are often more profitable from a political than from a financial perspective. Also, the more money government redistributes through various programs, the more incentives there will be for individuals and corporations to try to improve their condition through government favours instead of productive activities.
The Montreal Economic Institute welcomed Robert Lawson of Capital University in Ohio, one of three authors of a study that compared the size of government and economic growth in 23 OECD countries over a period of four decades. Using a regression analysis, they found a strong and persistent negative relationship between the two. The higher the level of public expenditures in a given country, the lower we can expect its economic growth to be. Their results suggest a 10-percentage-point increase in government expenditures as a share of GDP (say, from 35 per cent to 45 per cent) leads to a permanent one-percentage-point reduction in annual economic growth.
What does this mean for Canada?:
Had public spending in Canada remained at its 1960 level, the Canadian economy would have grown so much faster that by 1998, it is estimated that our GDP would have reached $1,318 billion instead of $861 billion. This means revenue per capita, that is, the amount of wealth produced on average for each Canadian man, woman and child, would have been $15,065 larger. For a typical family of four, that’s $60,259.