OECD data suggests social spending and productivity may be related
By Jenny Ruth
Feb. 4 (BusinessDesk) - As the government prepares to deliver what it calls its first “well-being” budget in May, a
former Reserve Bank official more likely to criticise such “feel good” efforts has found statistical support for the
notion that social spending can boost productivity.
Michael Reddell cites OECD figures in his latest Croaking Cassandra blog which show highly productive countries tend to
spend more on things such as health, unemployment and disability benefits, active labour market policies and aged
The numbers rank countries by the share of GDP committed to social spending. They exclude spending on education, other
than on early childhood spending, and show New Zealand was very close to being the median country in 2018.
“Whether or not one approves of such high levels of social spending – and I’m pretty uneasy – it should not be
overlooked that among the nine largest spenders, seven are in the top-tier OECD group for average labour productivity,”
The two exceptions were Finland and Italy – France topped the list with the highest percentage of GDP used for public
social spending, followed by Belgium.
“I’m not offering any thoughts about causation – and other very high productivity countries, US, Ireland and the
Netherlands, are below the median – but it remains a data point one has to take seriously.”
The figures also show that social spending has increased significantly in most OECD countries, particularly in Japan,
but that in some cases, including New Zealand, social spending has actually fallen since 1990.
“In 1990, the New Zealand Superannuation eligibility age was still 60 and the unemployment rate was rising rapidly in
the midst of our disinflation and restructuring,” Reddell says.
But such numbers are only part of the picture. “If the government compels you to save, or compels you to buy medical
insurance, or offers tax treatments that incentivise such private spending, the differences between public and private
spending can quickly get rather blurry,” he says.
Switzerland, for example, is the seventh lowest social spender out of 36 countries in an OECD chart but it requires
everyone in Switzerland to take out medical insurance.
“That might, or might not, be a better system, but it means that lowish direct public spending numbers don’t always tell
a simple small-government – or self-reliant – story.”
The OECD attempted to adjust the figures to reflect some of the different institutional arrangements, and that bumped up
both the Netherlands and the US, ranked 11th and 16th bottom in the first chart, up to just behind France at the top.
Australia moved up from 14th lowest spender in the first chart to 13th largest while New Zealand moved from 19th largest
spender down to 25th. [Corrected]
“There are all sorts of quibbles possible about these numbers, including how safe it is to simply add them up – to what
extent are the components really apples and oranges?” Reddell says.
“But it is probably salutary to note that there is now a stronger alignment between income/productivity levels and net
social expenditure as a share of GDP than was evident in the first chart,” he says.
The countries that spend less on social services tend to be poorer and less productive.
“Whether or not one approves of high rates of social spending, it is at least consistent with the story that much higher
productivity gives countries, and individuals, options – practical and political – that poorer and less productive
countries don’t have.”