Fraser Forum

William Watson: The OECD’s surprising statistics on social spending

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Well, maybe they’re not actually that surprising, since the OECD has been putting them out for a few years now and the story they tell hasn't changed much. But that story, recounted again in the latest version of its cross-country data on social spending, is not very well known and runs strongly contrary to longstanding Canadian views about where this country ranks in the world hierarchy of social spenders.

And “strongly contrary” doesn’t even begin to describe the case regarding our customary view of where our neighbour to the immediate south ranks.

To begin, the OECD tabulates traditional measures of government spending on social matters—health and education, mainly—as a share of GDP. No real surprise here. The top five spenders are, in descending order: France, Finland, Belgium, Italy and Denmark. Well, actually, maybe it’s at least a small surprise that Sweden and Norway don’t top the list. (They’re seventh and 10th, respectively. Note that this is 2015-16 data.) But Europe clearly dominates the top 10.

To go into the details, average social spending by OECD governments is 21 per cent of GDP. The United States, as you’d expect, is below average, at 19.3 per cent of GDP. As you probably wouldn’t expect, we’re below that, at 17.2 per cent, just between Ireland and Israel (both at 16.1 per cent) and Estonia (17.4 per cent).

To emphasize, this is cash spending by government on social policies of one kind or another, and the U.S. is spending more than two points of GDP more than we are. Not your usual Canadian assumption about our two countries!

But that usual assumption almost certainly doesn’t take into account that the U.S. runs two very big “single-payer” medicare programs: Medicare itself, for people 65 and over, and Medicaid, for poor people.

But hold on, the turbulence to Canadian assumptions gets even more extreme. The OECD also calculates the sum of private and public spending on social purposes. For private spending, it doesn’t count what you’d think it might count, namely, simple out-of-pocket spending on things such as health care and drugs, which we’d all assume to be bigger in the U.S. than elsewhere. Rather, it examines shared spending, as through a company health insurance plan, that’s encouraged by government regulation, mandate or tax preference. It also deducts any taxing back of social benefits through the tax system, which is common in many European welfare states and reduces the net generosity of many of their social programs.

When the OECD does this more comprehensive calculation, the rankings for what is now total social spending, including both direct spending by governments, as well as spending encouraged by government, experience substantial re-ordering. France is still first, spending 31.2 per cent of its GDP, which is actually a little less than the 31.5 per cent it spends directly through the government. But second is no longer Finland or some other Scandinavian country. No, second is—drum roll—the United States, spending 28.8 per cent of its GDP this way.

Where’s Canada? We’re still below the OECD average, though this time only one spot below (versus nine spots below in the direct spending calculation). The OECD average for this more comprehensive measure of government spending is 21.4 per cent of GDP. We’re at 20.0 per cent.

In sum, this broader measure raises our social spending from 17.2 per cent of GDP to 20.0 per cent. But it raises U.S. social spending from 19.3 per cent to 28.8 per cent. They leap up the charts. We climb a few rungs.

Such numbers are useful only so far as they go, of course. Economists are always interested in how different incentives change spending patterns and what the effects are on people at different income levels. A simple ratio-to-GDP says nothing about that. Economists also think a lot about efficiency. Maybe the U.S.’s very high social spending goes to the wrong groups or wastes resources outright. But that’s only a common Canadian assumption about U.S. social policy.

And what the OECD’s data show is that common Canadian assumptions can be wildly wrong.


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