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The International Monetary Fund (IMF) has a couple of public dashboards showing government expenditures as a percentage of Gross Domestic Product (GDP), by country. See here and here. There is nothing wrong in doing this if we keep in mind that we are using GDP as a denominator just as a tool to give us a reference of the relative size of government expenditures in different countries. But, based on this kind of data, it is common to hear things like “government expenditures were 61% of the entire French economy or 45% of the US economy in 2020,” as if these numbers were breaking down the total of the economy (100%) in its government and non-government portions. This would be incorrect and, unfortunately, it ends up supporting all sorts of confused discussions about the role of government in the economy.

The comparison between government expenditures and GDP is one of apples and oranges and only makes sense if we understand, again, that GDP is being used as a denominator only as a convenient tool to facilitate country comparisons. Government expenditures, as reflected in databases like that of the IMF, are measures of total expenditures, either by central and local governments or just by central governments (depending on the country), over a one year period. GDP does not measure total expenditures, but rather “value added” by the economy over a one year period. The difference is that measures of value added discount from measures of expenditures, the purchases of intermediate goods and services used to provide the goods and services by the sector in question. Value added is used when measuring output by sector, to allow summing these sectors without double counting. The result is a general measure of output, such as GDP.

To illustrate, see the table below (Figure 1). The second column shows the government as a share of GDP in 2020 for selected countries, as measured in total expenditures and reported by the IMF. The third column shows government consumption as a share of GDP, as measured in value added and reported by the World Bank World Development Indicators. The actual share of the GDP that corresponds to the government would need to add government investment (fixed capital formation) to government consumption. These data were not readily available for most countries in the WB WDI dataset and it seems like disentangling government and private fixed capital formation is not very simple. So I added total fixed capital formation (public and private) to government consumption, for the sake of comparison with IMF numbers (fourth column). The actual weight of the government in GDP should be somewhere between columns three and four.

Figure 1. Government Relative to GDP, Selected Countries, 2020

Sources: 1. IMF DATAMAPPER. Fiscal Monitor, October 2023, https://www.imf.org/external/datamapper/G_X_G01_GDP_PT@FM/ADVEC/FM_EMG/FM_LIDC. 2. World Bank World Development Indicators. Accessed April 2024, https://databank.worldbank.org/source/world-development-indicators.

Note: government expenditures in 2020 were generally higher than usual, as countries tried to minimize the economic effects of the COVID 19 pandemic.

I am sure there are better data out there somewhere but, after spending some time trying to unbury the IMF metadata (should be more easily findable) my patience was running low. For the US, see data from the Bureau of Economic Analysis which defines the value added by Government as being “the sum of compensation paid to general government employees plus consumption of government owned fixed capital (CFC), which is commonly known as depreciation (BEA, 2008, p.29).” My point still holds.

Another way of looking at the actual weight of government expenditures in the economy would be to compare, not with GDP, but with total output in an economy over a one year period, that is, not discounting intermediate products and services. Country national accounts typically do show this indicator and it tends to be roughly twice as large of the total value added in any one year. The ratio of total output to value added is available in Table 2.6 of the United Nations (UN) National Accounts Statistics. Figure 2 below applies that ratio to the IMF indicator of government expenditures as a share of GDP to obtain a rough estimate of the share of government expenditures over total output in the last column of the table. Note that the resulting estimates are within the range of columns 3 and 4 of Figure 1.

Figure 2. Government Relative to Total Output, Selected Countries, 2020

Sources: 1. IMF DATAMAPPER. Fiscal Monitor, October 2023, https://www.imf.org/external/datamapper/G_X_G01_GDP_PT@FM/ADVEC/FM_EMG/FM_LIDC; 2. UN National Accounts Statistics. Main Aggregates and Detailed Tables. Table 2.6, Accessed April 2024, https://unstats.un.org/unsd/nationalaccount/madt.asp?SB=1&#SBG. 

Again, I am sure there are better data out there, but the fact that I had to spend considerable time deciphering the data above and still don’t have non-misleading comparable cross-country data for the actual size of government expenditures relative to total output is of relevance itself for my purposes on this blog.

Other than the issue of comparing apples and oranges, there are additional considerations we need to make when assessing statements like the ones I made above (“government expenditures were 61% of the entire French economy or 45% of the US economy in 2020”). One is about what we are supposed to infer from looking at government expenditures. If a measure is provided as a reference for the extent to which governments participate in the economy, using expenditures ignores the entire side of government regulation, which, in market economies, is likely at least as important as government expenditures to understand the influence of the government in the functioning of an economy. Looking beyond total expenditures and into their breakdown by levels of government, by consumption and investment, and other disaggregated data would likely also contribute to a much richer and productive discussion, not to mention the large literature on taxation, as well as financial indicators of debt and debt sustainability. These are all subjects that the IMF delves into professionally and releases publicly a lot of information about, even if not always easy to decipher. I can’t help wondering, however, whether sites like those of the IMF dashboards linked above are actually doing more harm than good by stressing one small and misleading indicator of government participation in the economy.

Another consideration in interpreting data such as that shown in the IMF dashboards is about GDP and what it represents. Although we often think of it as an indicator of the size of the economy: a) there are important limitations to this indicator, and b) when used, there are different indicators that may be more or less appropriate for different purposes. I will look at these issues in a future post.

References

BEA (Bureau of Economic Analysis). 2008. A Primer on BEA’s Government Accounts, by Bruce E. Baker and Pamela A. Kelly. Available: https://apps.bea.gov/scb/pdf/2008/03%20March/0308_primer.pdf?_gl=1*1anuf1l*_ga*NjM4MDQ4ODA2LjE3MTI3Nzc2ODE.*_ga_J4698JNNFT*MTcxMzExMzg4NC44LjAuMTcxMzExMzg4NC42MC4wLjA. Accessed: April 14, 20244.

BEA (Bureau of Economic Analysis). 2010. Frequently Asked Questions: BEA seems to have several different measures of government spending. What are they for and what do they measure? Available: https://www.bea.gov/help/faq/552 Accessed: April 12, 2024

International Monetary Fund (IMF). 2023. IMF DATAMAPPER. Fiscal Monitor, October. Available: https://www.imf.org/external/datamapper/G_X_G01_GDP_PT@FM/ADVEC/FM_EMG/FM_LIDC; Accessed: April 14, 2024.

United Nations (UN). 2024. UN National Accounts Statistics. Main Aggregates and Detailed Tables. Table 2.6, Available: https://unstats.un.org/unsd/nationalaccount/madt.asp?SB=1&#SBG; Accessed: April 14, 2024.

World Bank. 2024. World Development Indicators. Available:  https://databank.worldbank.org/source/world-development-indicators; Accessed: April 14, 2024