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Economist links social spending and productivity

As the government prepares to deliver what it calls its first “well-being” budget in May, a former Reserve Bank official more likely to criticise such “feel good” efforts, has found statistical correlation between highly productive countries and ones that have most commitment to social spending.

Economist Michael Reddell cites OECD figures in his latest Croaking Cassandra blog which show highly productive countries tend to spend more on things such as health, unemployment and disability benefits, active labour market policies and aged pensions.

The numbers rank countries by the share of GDP committed to social spending. They exclude spending on education, other than on early childhood spending, and show New Zealand was very close to being the median country in 2018.

“Whether or not one approves of such high levels of social spending – and I’m pretty uneasy – it should not be overlooked that among the nine largest spenders, seven are in the top-tier OECD group for average labour productivity,” Reddell says.

The two exceptions were Finland and Italy – France topped the list with the highest percentage of GDP used for public social spending, followed by Belgium.

“I’m not offering any thoughts about causation – and other very high productivity countries, US, Ireland and the Netherlands, are below the median – but it remains a data point one has to take seriously.”

The figures also show that social spending has increased significantly in most OECD countries, particularly in Japan, but that in some cases, including New Zealand, social spending has actually fallen since 1990.

“In 1990, the New Zealand Superannuation eligibility age was still 60 and the unemployment rate was rising rapidly in the midst of our disinflation and restructuring,” Reddell says.

But such numbers are only part of the picture. “If the government compels you to save, or compels you to buy medical insurance, or offers tax treatments that incentivise such private spending, the differences between public and private spending can quickly get rather blurry,” he says.

Switzerland, for example, is the seventh lowest social spender out of 36 countries in an OECD chart but it requires everyone in Switzerland to take out medical insurance.

“That might, or might not, be a better system, but it means that lowish direct public spending numbers don’t always tell a simple small-government – or self-reliant – story.”

The OECD attempted to adjust the figures to reflect some of the different institutional arrangements, and that bumped up both the Netherlands and the US, ranked 11th and 16th bottom in the first chart, up to just behind France at the top.

Australia moved up from 14th lowest spender in the first chart to 13th largest while New Zealand moved from 19th largest spender down to 25th.

“There are all sorts of quibbles possible about these numbers, including how safe it is to simply add them up – to what extent are the components really apples and oranges?” Reddell says.

“But it is probably salutary to note that there is now a stronger alignment between income/productivity levels and net social expenditure as a share of GDP than was evident in the first chart,” he says.

The countries that spend less on social services tend to be poorer and less productive.

“Whether or not one approves of high rates of social spending, it is at least consistent with the story that much higher productivity gives countries, and individuals, options – practical and political – that poorer and less productive countries don’t have.”

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