Agnieszka Gehringer (Flossbach von Storch Research Institute) | Governments are increasingly being given new tasks to achieve various economic policy objectives. Looking at the major eurozone members, this report shows that high expectations about the role of the state in solving the most pressing problems may be frustrated by declining productivity of public spending and decreasing government effectiveness.
Public spending in the four large euro area Member States, Germany, France, Italy and Spain, has increased significantly in recent decades (graph). The largest increase in total public spending as a percentage of nominal GDP was in Spain, from 37% in 2000 to more than 51% in 2020, due to a strong increase in pandemic-related spending. A similar trend was observed in Italy, where the corresponding share rose from 45% at the beginning of the millennium to 55% in 2021. In France, the increase was less pronounced (from 50% in 2000 to 58% in 2021), but the relative size of government in France tends to be among the highest in the developed world. The most moderate increase in state involvement occurred in Germany, from 47% in 2000 to 51% in 2021.
The growing size of the public sector is likely to be due to multiple factors. One of the most important explanations can be found in the increased frequency and severity of crises in recent decades. The first significant expenditure item increase occurred immediately after the great financial crisis of 2008. The second significant increase was triggered by the simultaneous events of the recent crisis since the end of 2019, the pandemic and the Russian invasion of Ukraine.
Another important explanation lies in the structural development of population ageing and the sharp increase in spending on social security systems that this entails.