Nova workboard

a blog from young economists at Nova SBE

Size and possibilities of the Public sector.

By Ulf Bjerre 21009

The size of the public sector varies greatly around the world, and so do the responsibilities of it.

What in some countries are considered a necessity of supply of public goods may in other countries be considered as an act of interference of the private sphere. In many western countries the size of the public sector is a political decision. 

But the size of the public sector is not only determined by mere politics, there are also constraints on the possibilities of public intervention between countries.

 

Measuring the size of the public sector can be done in several ways, but one way to look at it is in terms of total tax revenues as percentage of GDP. With this measurement unit one finds that Denmark was the highest ranked country in the world in 2010[1], closely followed by the other Scandinavian countries.

 

Coming from a small Scandinavian country as Denmark one is used to a big and very paternalistic public sector. Even though the last years of economic crisis have put its pressure on the size of the public sector, and that most politicians now talk of zero-growth in the public sector, the size and responsibilities are still some of the highest in the world. With one of the highest tax pressures in the list of public supplied goods in Denmark is long and this had led to the term “The universal welfare model”, which is very typical for the Scandinavian countries. The Scandinavian welfare model is based on the idea of community, shared responsibility and equal rights to health, education and culture[2].

Even though most people would probably agree on these relations, the means of achieving them vary a lot from country to country. 

One thing however, that is common for all countries independent of political conviction is the thought that a public sector is necessary. The public sets conditions for the market, such as property rights, and remedies market failures such as externalities.

 

Besides having some of the world’s biggest public sectors, the Scandinavian countries are also among the wealthiest. Not that there necessarily has to be a correlation between the two, but many aspects of controlling the public sector becomes easier.

 

One example of a country placed in the other end of the lists, both concerning public sector size and wealth is the West African country Burkina Faso. My personal impression is that there is a desire for a bigger public sector amongst the population, but paying taxes and thereby contributing to the public sector is often close to impossible. In Burkina Faso the personal income tax rate varies from 2%-30%, and the top corporate tax rate is 30 %. Other taxes include a value-added tax (VAT) and a tax on insurance contracts. In the most recent year, overall tax revenue, as a percentage of GDP was 11.5 %.

 

There is per say, nothing extraordinary to these numbers, but in a country where up to 85%[3] of the employed are working in the informal sector, collecting income taxes is not just a problem, it is impossible. Furthermore paying taxes for some families is not an option, as the income is not sufficient to feed the households. When income taxes are not a realistic and sufficient opportunity for collecting taxes to run the public sector, VAT taxes is an obvious opportunity. However Burkina Faso has temporarily suspended the VAT on foodstuffs, but there are consumption taxes on specified items, such as petroleum products and tobacco and local taxes on motor vehicles.

 

In countries such as Burkina Faso public sector of the size and range like the Scandinavians is not a possibility, no matter the political desires.

 

The growth of the public sector in the western countries happened at the same time as the period of high economic growth in the period after the Second World War. Therefor it is obvious to believe that a development of the public sector is closely related to the development of the respective country. 

 

 

 

 

 

 

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Author: studentnovasbe

Master student in Nova Sbe

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