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Written by: Eugene Steuerle
President Bill Clinton famously declared in his 1996 State of the Union address, “The era of big government is over.” He didn’t get it quite right. The era of ever-bigger, or growing, government was over, but big government has been here to stay.
The major political parties in most developed democracies have not adapted to the modern fiscal environment. They simply can’t get their numbers to add up and to pay for the changes they advocate. You can see this in the 2024 platforms of the US Democratic and Republican parties. Republicans claim they will achieve smaller government, but mainly by cutting taxes. Democrats claim they will somehow get bigger government but can’t come up with the revenues to pay for it. Neither party confronts how their various promises fit in with massively growing debt, interest costs, and shortfalls in Social Security and Medicare spending relative to revenues.
It’s hard to deny that government is big
On the fiscal front, government spending as a share of the economy provides one way to measure government size. In 2023, total federal, state, and local expenditures in the US were about 35 percent of gross domestic product (GDP).
However, this metric needs to account for federal tax expenditures or subsidies through the tax code, which my TPC colleagues have estimated to be about 6 percent of GDP. Tax expenditure data are sparse at the state and local level, but since that spending is about a third of federal spending, about 2 percent of GDP is a reasonable approximation. Total expenditures and estimated tax subsidies add up to 43 percent of GDP.
Another measure is revenue as a share of the economy. In 2023, federal, state, and local receipts, after reduction for tax subsidies, totaled 27 percent of GDP. The ratio of taxes to GDP has been relatively constant in the US and across 38 OECD (Organization for Economic Cooperation and Development) countries since at least the beginning of this century. Though a bit higher elsewhere, US real government spending per capita still matches most others because the US is more prosperous.
However, the government can only get so big
Governments in developed countries grew big as the modern economy made it possible, and voters demanded it. With industrialization, governments expanded infrastructure such as highways, railroads, and education to promote growth. As the 20th century progressed, they increasingly developed systems to mitigate suffering, promote health, and reduce poverty. Every developed nation provides substantial old age support and support for healthcare, and none appears likely to reduce those expensive efforts significantly.
Government growth did outpace economic growth for much of the 20th century, but that cannot continue forever. And while the public has long been content with accepting more money and services, it has been reluctant to pay higher shares of its income. Even the growth in domestic spending throughout much of the post-World War II period in the US was primarily due to the decline in the defense budget. Congress raised federal taxes mainly during the world wars, not between or afterward.
Ever-bigger government also brings complications like inefficiency, waste, corruption, and excessive capture by special interests. An increase in a high tax rate can cause more distortions in economic activity than an increase in a low rate. Increasing years of future retirement support for the non-poor near-elderly no longer does much to reduce elderly poverty. In other words, a growing government eventually works less efficiently to accomplish the very purposes it sets out to achieve.
Once government is big, economic growth provides the means to do more
Once the government is large, economic growth—not legislative changes—mainly determines the future quantity of government services. Real, inflation-adjusted per capita income more than doubled since Ronald Reagan was elected president, and so did federal government spending per capita. The huge legislative battles over larger or smaller government did little to affect that overall growth.
Unfortunately, legislators throughout the developed world have put so many promises in law for the indefinite future that they’ve blocked the innovations that each generation demands in democracies. In the US, mandatory spending and interest, which require no new appropriations, comprised 26 percent of outlays in 1962 but 72 percent of outlays and almost all revenues in 2023.
As political parties try to wiggle around the inescapable truth that they must limit past commitments to make room for new ones, illogical claims on the fringes only grow.
The endless debate over right-sizing government is misplaced, especially when focused on the next deficit-swelling spending increase or tax cut. Instead, modern governance mainly requires shifting resources—especially those made possible by economic growth—to meet the opportunities, needs, and democratic wishes of today’s and tomorrow’s electorate. Until our elected officials can adjust expectations to this simple requirement, governing and political campaigning will remain unusually messy and misleading affairs.
*Largely reproduced from Tax Vox, August 12, 2024. Posts on Tax Vox are solely the opinion of the authors and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.