Area I
Size of Government: Consumption, Transfers, and Subsidies

A General Government Consumption Expenditures as a Percent of Total Consumption (weight .500)

B Transfers and Subsidies as a Percent of GDP (weight .500)

The two components in this area are indicative of the size of government. When governments focus on core functions that involve (a) the protection of persons and property and (b) the provision of public goods (things like national defence that are difficult to provide via markets), they may enhance economic freedom. Our research on this topic indicates that the core functions, defined very liberally, can be provided with approximately 10 percent of GDP.[See James Gwartney, Robert Lawson, and Randall Holcombe, Size and Functions of Government and Economic Freedom, (Washington, DC: Joint Economic Committee, 1998). There is no assurance that governments spending a small amount will focus their expenditures on core functions that are, at least potentially, consistent with economic freedom.]  As government expenditures expand beyond the core functions, the political process is substituted for the coordination of markets and the security of property rights is eroded. Regardless of whether financed by taxes or borrowing, government spending beyond the minimal core level reduces economic freedom.

Data for government and private consumption are available for most countries. As government consumption increases relative to total consumption (private plus government), politics supplants personal choice and voluntary exchange. Larger government consumption means less private consumption and less economic freedom. Thus, countries with higher levels of government consumption as a share of the total are given lower ratings for Component I-A.

Transfers and subsidies violate the freedom of individuals to keep the value of their productivity. When governments tax income from one person in order to transfer it to another, usually in an effort to "buy" votes, they are violating the property rights of individuals. Such taking of property (including labour services) without compensation conflicts with economic freedom. The ratio of transfers and subsidies to GDP is a measure of the degree to which governments engage in such activities. As this ratio increases, countries are given a lower rating for Component I-B.

Both of these components are continuous variables for which higher values indicate less economic freedom. The formula used to derive the zero-to-10 country ratings was: (Vmax - Vi) / (Vmax - Vmin) multiplied by 10. The larger the actual value for the component, the lower the rating. The numbers above in parentheses e.g., (weight .271), represent the portion of the area rating that is determined by a specific component. These values were determined by principal component analysis. The 1997 ratings for this area are presented on the following page.

Area I Graphic: Size of Government: Consumption, Transfers, Subsidies, 1997

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.