Has the government been “over-spending”?

The question of whether the government has been over-spending is not one I can actually answer – as there is no way of telling exactly what sized government New Zealand wants. However, looking at how government spending compares to recent history can give us some idea about what is going on. Lets do this in the below graphs.

govt spending

Government Spending as a % of Nominal GDP: Source Stats NZ national accounts.

So according to these figures government spending as a % of GDP is at its highest level in recent history! However, we have to keep in mind that the economy is in recession – and during a recession governments size compared the economy rises. Even so, government’s size is undeniably bigger relative to the economy. But is this because of government “consumption” or “investment”?

govt c and i

Government Spending as a % of Nominal GDP: Source Stats NZ national accounts.

Now this graph suggests that increases in government consumption have been an issue, but only over the past 3 years (or Labour’s last term). The driver of governments large share of economic activity through the middle of the decade has been government investment.

This concerns me. Our current government wants to spend more on infrastructure and investment, when governments share of such work is already very high. As I am a strong believer in “crowding out” it is very very possible that the government has been over-investing.

However, these graphs are simply meant to be indicative, you can make your own conclusions after looking at them 🙂

2 replies
  1. Miguel Sanchez
    Miguel Sanchez says:

    How does it look in real terms Matt? I’m fairly certain there’s been a big shift in the relative prices of consumption vs investment in the last decade or so.

  2. Matt Nolan
    Matt Nolan says:

    @Miguel Sanchez

    The reason I used nominal was so that the stats were comparable to the CA deficit. However, the question on real is a very good one.

    There has been a mammoth shift, between the price of PRIVATE consumption and investment. Given that this is mainly the result of tradable prices this has not feed into government.

    In real terms the story on the consumption and investment sides is very much the same, if anything it suggests even less overspending.

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