Does small government really work? A look at the least well-funded governments around the world

Future of Finance
Future of Finance

The deadline for filing 2016 tax returns in the US looms today. And it’s closely followed by Tax Freedom Day: April 24 will mark 31% of 2017 elapsing, which symbolically equals the 31% of national income that goes to paying taxes. In Washington, lawmakers are busy mulling budget plans to spend those taxes, as well as reforms to the tax code itself. Small government advocates will claim considerable advantages to reduced spending and taxation on economic dynamism. But the international evidence suggests otherwise: The link between low government expenditure and a strong economy worldwide is not only weak, it is backward. Want to see some of the smallest governments in the world? They are in Africa, where per capita income is a fraction of US levels.

The International Comparison Project collects global data on government spending on “collective consumption”: defense, justice, central administration, regulatory oversight—the kind of spending that even many libertarians support. It excludes all capital investments (building infrastructure, for example) alongside government spending on “individual consumption” (primarily housing support, health, and education) and transfers like social security and the earned income tax credit. The US spent nearly $1.6 trillion, or around $5,000 per person providing collective consumption services in 2011. Germany spent $227 billion, or around $2,780 per person using purchasing power exchange rates that adjust for the different costs of goods and services across countries. Kenya spent just $7.4 billion. Sure, its population is only 42 million compares to the US at 312 million, but that still means that the country was spending just $178 per Kenyan per year, or less than 4% of the US total.

Mozambique, spending $1.3 billion, had a per capita pure public goods expenditure around 1% of the US total. And the New York Parks and Recreation Department alone has a budget larger than total Liberian spending on defense, justice, administration, and regulation. Many might look at Liberia and suggest a bit more government spending on security might be a good idea, to help keep a fragile peace, to contain another Ebola outbreak, or even to ensure justice—but nowhere beats Liberia if you think small government is the solution.

 The New York Parks and Recreation Department alone has a budget larger than total Liberian spending on defense, justice, administration, and regulation Or look at some of the government spending on “individual consumption”: Liberia’s total national education spending—government and private combined—is about $61 million per year, according to the World Bank. That is one fortieth the budget of the Montgomery Country Public School System in Maryland. The country only spends about $46 per person per year on health. Such pitiful funding is one reason behind an illiteracy rate amongst young Liberians that is just below 50% and why about seven out of every 100 children born in the country die before their fifth birthday.

African governments are so small because there just isn’t the funding to make them larger. Poor countries see a lower tax take as a percentage of their economy, but more importantly their economies are a lot smaller. And that makes for a tiny revenue base. Tax receipts as a percentage of GDP in high income countries averages around 24% according to data from the International Center for Tax and Development. That compares to 14% in low-income countries. In terms of dollars of tax revenue per person that means the average is about $10,100 in high-income countries compared to $88 per year in low-income countries.

Despite this minuscule government revenue, and while they have been growing comparatively fast of late, low income countries still have low incomes. That suggests a problem with the idea that small government is the secret to growth. In fact, a recent analysis of 87 different studies looking at the effect of government size on economic growth by Mehmet Ugur of University of Greenwich and colleagues helpfully concluded the relationship is “context specific”—i.e. it was sometimes positive and sometimes negative. And analysis of changes in tax rates amongst the OECD club of rich countries by Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva for the National Bureau of Economic Research finds that even dramatic declines in marginal income tax rates have had no effect on economic growth.

For all governments in developing countries that remain tiny by the standards of the rich world, they are still much larger than they were thirty years ago. And that’s true globally: Timothy Besley and Torsten Persson examine cross-country data on taxation over the twentieth century amongst countries that are rich today, and find tax has almost tripled as a share of national income. The proportion of total revenues from income tax in those same countries climbed from about 5% in 1900 to 50% by 2000. Governments have never been larger, but neither has the world ever been as wealthy, average life expectancies longer, or education and literacy rates higher than they are today. And perhaps big governments–and the taxes that support them—should get some of the credit for that.

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