July 2012: The Differences between Bad Government Expenditure and Good Government Expenditure

In this difficult days for the European economy, we was been hearing a lot of comments related to the Government Expenditure in a very unproductive discussion. Always there were defenders of austerity and supporters of expenditure. But press is usually doing a very superficial analysis of this matter.

Although this is not time for a complete analysis I think that we could analyze in deeper this issue.

Looking at the figures of the main Euro economies we can see how different governments are implementing its policies of expenditure.

 

Graph 1 Evolution of the Government Expenditure in the main Euro economies (Data Source OECD)

As we can see, France is the champion of expenditure although his economy is lower than German one. It sounds reasonable that a bigger economy should need less percentage of Government Expenditure as consecuence of the volume effect. This is easy to understand for private managers that are trying to take advantages from scale economies.

The percentage of expenditure of Germany is similar to the Spanish one although the scale of its economy is much bigger as shows the next graph.

Graph 2 Gross Domestic Product of the main Euro economies (Data Source OECD)

This graph can show that Italy and France does not seem to understand well the concept of scale economy, or, perhaps that Germany does not understand the concept of wealth redistribution.

The solution to this question can be done if we analyze the part of the GDP that is applied in the salaries of the public staff.

Graph 3 Evolution of the Expenditure in Public Employees (Data Source OECD)

Except that we understand that wealth redistribution consists in transfer funds from private employees to public employees instead of a compensation of the market faults that lets to accumulate wealth unfairly. We must think that Germany has a good understanding about the concept of scale economy, or at least better than other countries.

In order to finish with this analysis I will show you the recent policies made in Spain for the previous government to avoid the international crisis, and the origin of the current debt crisis. This can be illustrated by the next graph:

 

Graph 4 Growth of the Expenditure in Public Employees

In the last years, there was a strong growth of the expenditure in public employees in Spain, because it has been increased as the same rate that the total expenditure (see graph 3). This is showing an increase of the public current expenses instead of taking advantage of these funds for public investments as the action to avoid a future crisis. This kind of action has been shown as a driver of national unemployment instead of a driver of future growth. Spain must assume now this great error in the past.

 

Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

  

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels

 

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