The Size and Composition of Government Spending in Europe and Its Impact on Well-Being

Abstract

SUMMARY This paper empirically analyzes whether large governments in Europe reflect efficient responses to a changing social and economic environment (‘welfare economic view’) as opposed to wasteful spending (‘public choice view’). To this end, the effect of government size on subjective well‐being is estimated in a combined survey and country‐level dataset covering 153,268 respondents from twelve EU countries over the 1990–2000 period. The first finding is an inversely U‐shaped relationship between government size and well‐being. In addition, the analysis suggests that given the high institutional quality as compared to other parts of the world there might be scope for a further enlargement of governments in the EU from a well‐being perspective. However, one must acknowledge that the effect on well‐being may be quite small and that democratic societies in Europe have no experience with even larger governments. The investigation also reveals that the impact of government size on well‐being depends negatively on levels of corruption and positively on the extent of decentralization. Moreover, left‐wing voters and low‐income earners are the main beneficiaries of a large public sector. Finally, in all twelve EU countries included in the sample higher levels of well‐being could have been achieved by allocating a higher share of public resources to education, while Finland and Germany could have given an additional boost to well‐being by cutting expenditures on social protection.

Subjective Wellbeing Impacts of National and Subnational Fiscal Policies

“…For example, several papers look at the relationship between the size of government consumption and subjective wellbeing. Results include finding a negative relationship (Bjørnskov et al 2007, Oishi et al 2011), finding no relationship (Ram 2009), finding a positive relationship (Flavin et al 2011(Flavin et al , 2014, and finding an inverse U pattern (Hessami 2010). Other papers have looked at taxation with Flavin et al (2011Flavin et al ( , 2014 finding higher taxation associated with higher SWB.…”

Who benefits from big government? A life satisfaction approach

“…Most closely related to our study is Hessami (2010). She uses individual data from the Eurobarometer surveys and tests if the size and composition of government spending has a positive or negative impact on life satisfaction.…”

“…1 Less attention has been paid to the impact that certain policies may have on wellbeing, conditional on personal life situation or distinctive policy preferences. 2 With only a few exceptions (Bjørnskov et al, 2008;Hessami, 2010), research neglects that different groups of society are affected differently by policies.…”

Subjective Wellbeing Impacts of National and Subnational Fiscal Policies

“…For example, several papers look at the relationship between the size of government consumption and subjective wellbeing. Results include finding a negative relationship (Bjørnskov et al 2007, Oishi et al 2011), finding no relationship (Ram 2009), finding a positive relationship (Flavin et al 2011(Flavin et al , 2014, and finding an inverse U pattern (Hessami 2010). Other papers have looked at taxation with Flavin et al (2011Flavin et al ( , 2014 finding higher taxation associated with higher SWB.…”