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Published by EH.NET (October 2000) 
 
Vito Tanzi and Ludger Schuknecht, _Public Spending in the 20th  
Century: A Global Perspective_. Cambridge and New York: Cambridge  
University Press, 2000. xvi + 291. 4.95 (cloth), ISBN:  
0-521-66291-5; 2.95 (paperback), ISBN: 0-521-66410-1. 
 
Reviewed for EH.NET by Roger Middleton, Reader in the History of  
Political Economy, University of Bristol, UK.  
<[log in to unmask]> 
 
 
This is an ambitious work which can be approached from two  
standpoints: of one that revisits Colin Clark's (1945) much-cited  
hypothesis that there is some critical level of public expenditure  
beyond which diminishing returns prevail; and of the other as a  
contribution to the current global debate on economic policy which is  
now dominated by the question of which model of capitalism works  
best. In one sense few economists are better qualified to undertake  
this study than these authors. Tanzi is the Director of the IMF's  
Fiscal Affairs Department and Schuknecht the Principal Economist in  
the European Central Bank's Fiscal Policies Division. Both have made  
significant contributions to the applied fiscal policy literature and  
to the political economy of state reform. But this book has ambitions  
to be more than a study of the current policy debate; it purports to  
be a historical survey of the growth of government since c.1870. Both  
seem to be economists, however, largely innocent of the ways of  
economic historians and of the economic history literature - also  
that of comparative public policy - and this has quite significant  
ramifications for the conduct of their study and the interpretation  
of the evidence. The problems raised are various. They range from  
extraordinary statements, such as a reference to Keynes (1926) as 'a  
little known book' (p. 4), through gross stereotypes of episodes in  
the history of economic thought and policy regimes, and onward to  
ignorance of so much of the literature on both government growth and  
the interpretation of long-run economic growth (of which more later).  
There is also a populist tone to much of this book which will grate  
with some readers, and not just those on the political left who will  
in any case be unconvinced by the 'Washington consensus' message. 
 
But, enough of this for the present and instead let us progress to  
the structure and organisation of this study, and of its conclusions,  
for there is much here that is very valuable. The basic thesis is  
established early: that the growth of public expenditure since c.1870  
was not caused by inevitable forces that made it imperative; that in  
terms of the standard socio-economic indicators (taken as proxies for  
government policy objectives) smaller, better focused government is  
better able to deliver than is big government; and, therefore, there  
exists significant scope currently for the big spending OECD states  
to contract their public sectors. Moreover, they argue, such fiscal  
consolidation can be attained without incurring major economic or  
political penalties. This thesis is pursued through four parts to the  
book: I, 'The growth of government: a historical perspective'  
(chapters 1-3); II, 'Gains from the growth of public expenditure'  
(chapters 4-6); III, 'The role of the state and government reform'  
(chapters 7-9); and IV, 'Recent experiences of countries in reforming  
the government' (chapters 10-12). The first two parts rely heavily on  
two long-term cross-country datasets for the OECD states: one on  
comparative public finance (where, despite the book's title, revenue  
data is also included and analysed) and the other on socio-economic  
indicators. These are provided for benchmark years (c.1870, 1913,  
1937, 1960, 1980 and 1990s) and sub-periods (for growth rates) for as  
many of the OECD states, and for as wide a range of social and  
economic indicators, as can be amassed as far back towards c.1870 as  
is possible. The underlying data is a useful resource in its own  
right, but it is unfortunate that the authors know so little about  
the public finance history of the individual states (including the  
existence of data sources often more suited than those general  
statistical collections they have used) and are unaware of important  
comparative work by authors such as Gemmell (1993), Steinmo (1993) or  
Castles (1998) which covers much of the ground they do but tells much  
richer stories about the growth of big government. 
 
Tanzi and Schuknecht's account of the rise of big government posits a  
watershed around 1960. Until that point, and for the majority of  
countries, the rise in public spending was matched by improved  
economic and social welfare, whereas thereafter diminishing returns  
became established. They find the rapid growth between 1960-80  
remarkable, given that it occurred when most countries were not  
engaged in war effort, there was no depression and the demographic  
developments were generally fiscally friendly. Their explanation is  
in terms of changed attitudes towards the role of the state - 'the  
heyday of Keynesianism and the time when governments were perceived  
by many to be efficient in allocating and redistributing resources  
and in stabilizing the economy' (p. 16). My problem with such  
arguments is that they attempt to provide overarching explanations  
for discrete blocks of time. An economic historian would not work  
with 1960-80, would want to factor OPEC into the argument, would  
raise doubts about the hegemony of Keynesianism in all OECD  
countries, and would in any case retort that Keynesianism was in  
crisis during the period of its supposed heyday and that fiscal  
retrenchment began well before 1980 in some countries (Britain being  
a notable case). 
 
I have problems also with the next stage, which involves dividing the  
OECD into three groups on the basis of their 1990 status as having  
big, medium or small public expenditure/GDP shares. The big spenders  
(shares of more than 50 per cent) thus comprise Belgium, Italy, the  
Netherlands, Norway and Sweden; the medium (40-50 per cent) Austria,  
Canada, France, Germany, Ireland, New Zealand and Spain; and the  
small (less than 40 per cent) Australia, Japan, Switzerland, UK and  
the US. If the purpose of the exercise is to show that between  
1960-90 socio-economic welfare advanced more relatively in the small  
spending group, then it matters intensely when and how we measure  
small. For example, anyone who knows anything about the political and  
economic history of postwar Britain will have reservations about the  
inclusion of the UK in the small group, knowing full well that its  
ranking in the OECD in 1960 was very different. Is a single  
observation, therefore, the appropriate way to proceed? We have also  
the problem that the small group is dominated by the US, and indeed  
this creates serious problems for the authors when it comes to the  
social stability indicators where in terms of the propensity to  
imprison the population and the divorce rate the US is quite out of  
line with the rest of the OECD. 
 
There is also a problem of conflation in the argument that the small  
group have enjoyed the greatest relative gains in economic welfare  
since 1960 because they have not been afflicted by big government. As  
is well-known amongst economic historians, comparative growth rates  
need in the first instance to be located within a long-term catch-up  
and convergence framework to accommodate the differing potential that  
individual economies have to grow more rapidly than average to attain  
the GDP/worker-hour levels of the productivity leader(s). There is no  
mention of this, and many will in any case be unconvinced by what is  
described as the 'new, modest, and understandably controversial  
approach' (p. 74) of inferring changes in socio-economic welfare at  
the level of the nation state directly from improvements in the  
values of the relevant socio-economic indicators. It is important to  
record that there is no formal hypothesis testing here, no  
econometrics of any sort, and this methodology is quite incapable of  
distinguishing causation from association. For example, they argue  
that 'countries with a large share of public provision and financing  
of health care, such as the United Kingdom, do not show better  
indicators than countries with a relatively smaller role for  
government in health, such as Switzerland. It is therefore  
questionable as to how far growing public expenditure is still  
contributing to these improvements. Progress in health indicators  
seems to be more correlated with technical progress and access to  
health care does not seem to differ much between countries any more'  
(pp. 91-2). What is not mentioned is the well-established  
relationship between health and income (and its distribution) - as  
their Table IV.2 (p. 79) shows GDP/capita was very nearly twice as  
high in Switzerland as in the UK in 1990 and 2.14 times as high in  
1960. 
 
The book is on more solid ground, and makes more of a contribution,  
in two areas. It provides a convincing account of how in practice the  
redistributive effects of the interaction of welfare spending and tax  
regimes produce little differences between the big and small spenders  
because when the total tax burden becomes a large share of a  
country's GDP, it is no longer very progressive and, equally, when  
public transfers become very large, they tend to be poorly targeted.  
Secondly, parts III and IV of the book provide a useful summary of  
the Washington consensus on what the role of the state ought to be  
and a blueprint for its achievement. It is thus likely to be widely  
read in policy circles, but those who want more nuanced accounts of  
what occurred in public spending will have to look elsewhere. 
 
 
Roger Middleton's recent books include _Charlatans or Saviours?:  
Economists and the British Economy from Marshall to Meade_ (1998),  
_The British Economy since 1945: Engaging with the Debate_ (2000) and  
(edited with Roger Backhouse) _Exemplary Economists: Introducing  
Twentieth-century Economists_ (2 volumes, 2000). 
 
References: 
 
Castles, F.G. (1998) _Comparative Public Policy: Patterns of Post-war  
Transformation_. Cheltenham: Edward Elgar. 
 
Clark, C.G. (1945) "Public Finance and Changes in the Value of  
Money," _Economic Journal_, 55 (4), pp. 371-89. 
 
Gemmell, N. (editor) (1993) _The Growth of the Public Sector:  
Theories and International Evidence_. Aldershot: Edward Elgar. 
 
Keynes, J.M. (1926) _The End of Laissez-faire_. London: Hogarth  
Press. Reprinted in _The Collected Writings of John Maynard Keynes_.  
Vol. IX: _Essays in Persuasion_. London: Macmillan (1972), pp. 272-94. 
 
Steinmo, S. (1993) _Taxation and Democracy: Swedish, British and  
American Approaches to Financing the Modern State_. New Haven: Yale  
University Press. 
 
 
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