The large size of government and government spending is misguided in a way that is inimical to liberty. Over the past century the size of government spending has grown outstandingly in advanced economies. Government spending has also grown in developing countries but typically to lower levels. Big spending programs are usually put in place for services such as health, education, defence as well as social security and welfare. Modern governments are supposed to provide for public goods as well as services and programs that affect the lives of individuals.
Big government is a reality in virtually in all rich democracies. In most developed countries, government spending accounts for over half of gross domestic product (GDP), while in the even lowest spending economies, it accounts for about one quarter of GDP. Developing countries are usually characterised by smaller government spending as a share of GDP because much of economic activity is outside the cash economy, and the revenue base for governments can be really limited. Developing countries in most cases cannot afford the elaborate welfare programs and social safety nets of developed economies.
One area where governments in the developed world have gradually retreated in recent years is the public ownership of corporations, especially financial institutions, utilities and resources and industrial companies. This same move is slow in the developing world. In the developed world many such enterprises and corporations have been sold to the private sector.
Economic theory proposes that governments should provide so called public goods, such as policing and defence which benefit the public at large because the free market would under furnish such services and goods. Government today does not limit itself to the provision of these public goods, but also distorts the provision of other goods and services like agriculture. Governments also furnish expensive programs as social safety nets, welfare as well as major infrastructure, which benefit direct users of these programs as well as the public at large. Such programs also referred to as quasi public goods often have a strong redistributive element, from wealthier taxpayers to big consumers of the programs.
The literature on fiscal federalism has developed several principles for assigning expenditure responsibilities among various governments. Practically, most constitutions assign legislative responsibilities explicitly and expenditure responsibilities implicitly. These assigned principles include apportioning responsibility to the order of government whose population benefits from a public good, decentralising or devolving program administration when there is strong advantage in feedback from the population being served and furnishing for some federal role in important programs that redistribute wealth among individuals. In various programs there is allowance for both orders of government to be involved.
Legislative responsibilities are usually assigned by constitutions and not expenditure responsibilities. The responsibility to administer spending programs usually stems from legislative responsibility. Exceptions exist notably in integrated federations such as Germany, where the constitution may lay down that constituent units or sub national units of government even including local government should administer certain programs in areas of concurrent legislative responsibility.
The assignment of responsibilities in federations is best addressed via wider considerations about devolved forms of government. Arguments for decentralisation or devolution are of the view that it furnishes greater public choice because lower tiers or sub national units of government are more responsive and closer to local populations. In such circumstances, multiple constituent government units or sub national government units can act as policy laboratories and learn from one another. Decentarlisation provides checks against abusive concentration of power as well as corruption and other malpractices attributed to big government and centralisation. However, those who argue for the welfare of the individual citizens and the need for coherent policies across a country usually prefer a more centralised from of government.
The big spending areas of education, pensions, health care and welfare further complicate the situation. For purposes of local responsiveness and cost efficiency, their management may be decentralised, but this may create barriers to mobility and lead to citizens across the country getting differing treatment. Therefore for purposes of program integrity and equity, many argue that central government should have a role. I concur, but this role must be limited.
To my view, governments need not over tax wealthier tax payers to achieve this aim. The strong redistributive operation by government defeats the purpose of limited government in a free society.