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The True Levels ofGovernment andSocial Expenditures inAdvanced Economies

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Policy Brief
NUMBER PB15-4

MARCH 2015

The True Levels of
Government and
Social Expenditures in
Advanced Economies
J a co b Fun k Kir ke gaard
Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for
International Economics, has been associated with the Institute since
2002. Before joining the Institute, he worked with the Danish Ministry of
Defense, the United Nations in Iraq, and in the private financial sector.
An author/editor of several books, he currently focuses his research efforts
on European economies and reform, foreign direct investment trends and
estimations, pension systems, demographics, offshoring, high-skilled immigration, and the productivity impact of information technology.
Author’s Note: This Policy Brief updates the analysis in Kirkegaard (2009)
and builds extensively on the data presented by the Organization for
Economic Cooperation and Development (OECD 2014a). It is part of
the Institute’s project on Inequality and Inclusive Capitalism supported
by major grants from the ERANDA Foundation. I am greatly indebted
to constructive comments from my colleagues Marcus Noland, Tomas
Hellebrandt, Edwin M. Truman, and Jan Zilinsky during the writing
process. Any remaining errors are solely my own responsibility.
© Peterson Institute for International Economics. All rights reserved.

One of the most contentious issues in contemporary politics
revolves around the optimal size of the government in society,
the services that government provides the public, and the
revenue raised to finance these services. Advanced economies
differ over the aggregate scope of general government spending.
Parts of Scandinavia devote 60 percent of GDP to the public
sector, whereas government spending accounts for only around
a third of GDP in South Korea and Switzerland.1 Such dispari-

1. Preliminary data for general government total outlays are from the OECD
(2014b, annex table 25).

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Washington, DC 20036

ties reflect differing societal preferences over whether particular
services, such as education and health care, should be provided
in the public or the private sector. Advanced economies’
contrasting choices in the scope and organization of social safety
nets add another dimension to cross-country divergences in
spending levels and the extent of resource redistribution among
income groups.
Despite the general understanding that these divergences
exist, surprisingly little information is available providing accurate comparisons of various levels of governments’ measures and
spending. When evaluating countries’ spending efficacy and
outcomes, care must be taken to include all sources in society
that account for resources devoted towards social purposes. The
complexity of advanced economies’ welfare states often masks
the true costs of government activities. Excessive emphasis is

Taking the full effects of tax systems
and social spending from both private
and public sources into account, the
United States is seen to be devoting
more resources toward social purposes
than is generally acknowledged.
typically devoted to information about direct government social
expenditures that is readily available and politically controversial. Meanwhile, many widely publicized analyses overlook the
various ways that modern tax systems and private spending
affect the level of social spending in different societies. This
omission is especially relevant to cross-country comparisons,
which are used by political leaders to attempt to sway the public
debate.
This Policy Brief provides evidence showing that much
of the conventional wisdom concerning social spending is
faulty, especially in the United States. Taking the full effects
of tax systems and social spending from both private and
public sources into account, the United States is seen to be
devoting more resources toward social purposes than is gener-

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Fax 202.659.3225

www.piie.com

NUMBER PB15-4

ally acknowledged. In fact, only the French spend more than
Americans, while the alleged welfare-addicted Scandinavians
and Europeans spend less on average.
This Policy Brief argues further that the important issue in
terms of social spending in the United States is not how many
resources are devoted to these purposes but how and for whose
benefit the money is spent. High aggregate social spending
in the United States has a very low impact on overall income
inequality and healthcare outcomes, whether measured in a
broad or narrow fashion. Adopting some best practices from
other countries in health care could thus led to substantial efficiency gains, not to mention better health outcomes.
I T H E R E L AT I V E S I Z E O F G O V E R N M E N TA L
S E R V I C E S S E C TO R S
The relative size of governmental services sectors in advanced
economies is one of the most scrutinized and ideologically
potent economic policy parameters, particularly in any transatlantic discussion of economic policy differences. Here the
size gap between the government sectors in the United States
and Europe is real. Since the mid-1990s, total annual general
government revenues have been roughly 13 percentage points
higher in the euro area (45.7 percent of GDP) than in the United
States (32.4 percent of GDP), though government expenditures

Spending levels on social services
are generally comparable on
both sides of the Atlantic.
have been slightly less divergent, averaging around 11 percent
of GDP because of higher general government deficits in the
United States.2 The general government sector in Europe is
hence about one third larger than in the United States.
This fact, however, is mostly relevant in ideologically-based
debates in which the size of government a priori takes on an independent value proposition. As the United States and European
countries have historically differed on whether some services
should be predominantly offered by the government or not, the
relative size of the general government alone reveals little about
how many resources countries devote towards providing often
similar types of services. This is especially true for education
and health care, where services in Europe are overwhelmingly
provided by the public sector, while in the United States these

2. Data from 1996–2015 (preliminary) for the general government sector (e.g.
all government levels) and all tax and nontax revenues are from the OECD
(2014b).

2

MARCH 2015

services are split more evenly between the general government
and private sectors. Consequently, when the public or private
provision of a service is not relevant, including private education and healthcare expenditures with the public sector yields a
better comparison of the relative scale of resources devoted to
delivering the same services in different advanced economies.
Figure 1 uses 2010 data—the latest available—to rank countries by their relevant combined total spending (in parentheses).3
General government expenditures on all activities other than
education and health care in the United States were just under
30 percent of GDP, noticeably lower than in the EU-184 at 37.3
percent. The United States and EU-18 spent essentially the
same amount on public education, just over 5 percent of GDP,
a considerably smaller amount than the Scandinavian countries. At 2.2 percent of GDP, private education expenditures in
the United States were considerably higher than in European
countries, though lower than in Korea and only slightly higher
than in Japan, Israel, Australia, and Canada. Public healthcare
expenses at 8.1 percent of GDP were equal in the United States
and the EU-18, though considerable variation exists among
European countries. Korea, Israel, Estonia, and Poland stand
out with substantially lower public healthcare expenses than
other countries in the Organization for Economic Cooperation
and Development (OECD). For private healthcare expenses,
the United States is a clear outlier among advanced economies,
spending fully 9 percent of GDP in 2010, almost three times
that of the next big spenders Portugal, Korea, and Canada.
In sum figure 1 shows that when sectoral origin classifications of spending are ignored, the United States spent slightly
more in the aggregate—54.1 percent of nominal GDP—on
providing residents with the same services as did the EU-18 at
53.4 percent. The high levels of procyclical deficit spending by
the US federal government likely inflates the general government expenditures somewhat, so what figure 1 illustrates is that
spending levels on social services are generally comparable on
both sides of the Atlantic. If one is looking for genuine small
3. 2010 is the latest year for which all data series (except where noted) are
available. This year is also the second year after the beginning of the Great
Recession in 2008, during a period when countercyclical government deficit
spending pushed overall general government outlays higher than the longterm average for virtually all OECD members. The general government total
outlay data in figure 1 includes spending from both automatic stabilizers and
discretionary fiscal stimulus. The smaller overall size of the general government
in the United States, relative to Europe, means that the percentage increase in
recession related expenditures is higher in the United States than in almost all
European countries. This factor is amplified by the relatively large size of the
fiscal stimulus under the American Recovery and Reinvestment Act of 2009
when compared to several European countries, such as Italy, which raised its
total general government expenses less in response to the Great Recession.
4. EU-18 refers to the 18 members of the European Union in figure 1 for
which data are available. EU-18 data values are GDP-weighted.

NUMBER PB15-4

Figure 1

MARCH 2015

Public and private spending on similar services in OECD countries, 2010

Asian
members

Anglo-Saxon
members

South and East
European members

North European
members

Scandinavian
members

percent of GDP
60

1.6

2.6
2.3

55

3.7
1.7

50

2.8

3.2

45

2.7

8.3

6.4

2.3

1.5

2.3
2.0

7.9

1.2

2.2

1.7

1.3

40

4.5

2.9

7.9

35

25

4.2

9.0
7.9

7.1

1.8

1.8

8.4

4.3

7.5

6.7

9.4

7.7

9.6

6.4
5.8

8.9
5.2

5.0

7.4

7.2

6.2

5.8

5.9
5.0

4.6
31.8

34.2

5.4

6.4

5.6

7.6
7.0

6.3

5.4
4.5

4.8

4.0

33.4
29.7

42.8

41.8

37.3

35.8 36.0

30.4

29.2

5.6

5.1

3.6

4.8

5.0

5.0

2.7

4.1
6.1

30

8.1

2.7

5.2

6.0

7.9
3.2

6.0

5.9

2.5
6.7

2.6

2.7

9.0
8.1

1.6

2.0

35.4 34.3

39.0
37.5 38.8
34.6

36.4

38.3 38.8

37.1

38.4

40.8

29.9 30.0

25.6

20

22.0

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Other general government expenditures

Public education

Public health care

Private education

Private health care

EU-18 = All EU members in this figure; OECD = Organization for Economic Cooperation and Development
* Private education expenditures for Germany and general government outlays for Ireland use 2009 data.
Note: Parantheses indicate country rank by relevant combined total spending.
Sources: OECD Education at a Glance (2013), OECD Economic Outlook Annex Tables (2014b), and OECD Health Statistics 2014—Frequently Requested Data (2014c).

government, Korea or Australia seem the obvious places to study
instead—though with a rapidly aging population, government
spending looks likely to rise in the former in the near future.
This should be comforting to those who believe economic
pocketbook issues are more important than ideology. In many
ways, roughly equally advanced economies with comparable
cultures and aging populations spend approximately the same
amount of resources on the same societal functions. Where they
differ most is whether it is the public or the private sector that
provides services. The distinction is arguably important, as it is
likely that total US spending levels on typically governmental
functions has been politically possible because the private sector
has shouldered a relatively larger share. Whether such private
sector provision of at least some typical governmental services—
noticeably health care—is inherently more efficient than similar

public sector expenditures is, when looking at actual relevant
sector outcomes, not empirically obvious.
II PUBLIC SOCIAL SPENDING AND
ACCO U N T I N G F O R T H E F U L L E F F E C T S O F T H E
TAX S YS T E M
Social spending and the potential for income redistribution
is more directly relevant to the discussion about the role of
government in advanced economies than aggregate spending
levels. Whatever can be measured with timely and reasonably
accurate data tends to get disproportionate attention in the
public debate. Consequently, the most frequently referenced
data concerns gross public social expenditures from government budgets. However, as public social systems in advanced

3

NUMBER PB15-4

economies differ greatly from one another in institutional
and financing terms, cross-country comparisons of budgetary
outlays are not straightforward. The OECD Social Expenditure
Database (SOCX) is an attempt to overcome these national
differences by providing the best available comprehensive
dataset for detailed public social expenditure comparisons.5
To facilitate cross-border spending analysis, the OECD
defines social spending as:
“...the provision by public (and private) institutions
of benefits to, and financial contributions targeted
at, households and individuals in order to provide
support during circumstances which adversely affect
their welfare, provided that the provision of the benefits and financial contributions constitutes neither a
direct payment for a particular good or service nor an
individual contract or transfer.”6
This definition includes all relevant public spending items
consisting of cash and/or benefits in kind in nine different policy
areas: old-age, survivor, and disability pensions; health care;
family support; active labor market policies; unemployment;
housing; and other social spending. The SOCX, thus somewhat
simplified, demarcates social spending as resources that help
people out in hard times that does not require a quid pro quo,
and it does not account for any difference in the degree to which
social spending items are privately appropriable. In other words,
there is no requirement in the SOCX that social spending be
for the public good or inherently redistributive in nature. For
instance, some types of preventative healthcare spending, say
to fight Ebola, will be entirely a public good, while receiving a
new kidney is a private benefit. This issue of appropriation has
important implications for whether particular social spending
items are innately suitable for private sector provision or not.
Using the latest available data from the SOCX, figure 2
shows that the lowest public social expenditures are generally
found in some of the poorest OECD countries in Asia and
Latin America, while the United States at 19 percent of GDP
is considerably below the OECD average of 21.5 percent and
far below most European countries and the EU-217 average of
26.3 percent. Three Scandinavian countries, Austria, Belgium,
5. The SOCX’s comprehensive spending coverage of all relevant budget items
overcomes many of the national differences in budget data; for instance, the
SOCX includes spending data for 300 social programs in France but only
about 50 in Canada, reflecting the far larger and more complex public social
spending in France. See OECD (2011) for additional details.
6. See the OECD Glossary of Statistical Terms, available at http://stats.oecd.
org/glossary/detail.asp?ID=2485.
7. EU-21 countries include the 21 members of the European Union included
in figure 2. EU-21 data values are GDP-weighted.

4

MARCH 2015

Italy, and France—all with gross public expenditures above 27
percent of GDP—top the advanced economies’ gross public
social spending rankings. All told, figure 2 likely conforms to
most people’s preconception of relative spending on social issues
in rich countries.
However, the gross public social spending data of the type
in figure 2, readily available from annual government budgets,
do not capture the full picture of a country’s total commitment
of resources towards social issues. In particular, this type of
data fails to account for the full effect of tax systems on public
spending on social protections. Two types of taxation issues
modify the true value of gross social spending:8
Direct Taxation of Cash Benefits Many OECD governments
levy full income tax and social security contributions on cash
transfers to beneficiaries, rendering the redistributive impact in
some cases substantially lower than suggested by gross spending
indicators. This is especially true in many high-tax jurisdictions.
Indirect Taxation of Consumption by Benefit Recipients All OECD
countries have some form of indirect taxation of all consumption,
including that arising from cash benefit recipients. Yet country
levels of indirect taxation of consumption of goods and services
vary greatly, and higher indirect taxation reduces the “after tax”
consumption opportunities provided by a given level of gross
benefits and hence also lower actual redistribution associated
with it. Again, this is a particularly relevant issue in OECD
countries with very high levels of sales and value-added taxation.
Figure 3 illustrates the effect of different direct and indirect
taxation systems in OECD countries and computes the public
net after-tax social expenditures in the OECD in 2011.
In most of the European countries with high spending,
governments claw back a sizable share of gross social expenditures through direct and indirect taxes. Hence, part of high
social spending in these countries is “self-financed,” and the
variation among OECD countries in public net after-tax social
spending is thus somewhat smaller than gross spending allocation data indicate. The country with the highest total tax burden
in the OECD in 2011—Denmark at 46.6 percent of GDP9—
clawed back the largest share of GDP from gross public social
spending, 6.7 percentage points,10 reducing its public net after8. Fiscal adjustment measures included here consist only of “first round effects” related to the net value of benefits. Second order effects derived from social expenditures, like the direct taxation of the earnings of those who provide
social services (e.g., staff in hospitals or childcare centers), are not included.
9. See OECD revenue statistics at http://stats.oecd.org/index.
aspx?DataSetCode=REV.
10. The Danish government recouped 4.0 percent of GDP in direct taxation
of cash benefits and 2.7 percent of GDP in indirect taxation of consumption
by benefit recipients.

NUMBER PB15-4

Figure 2

MARCH 2015

Gross public social expenditures in OECD countries, 2011

percent of GDP
35
Asian and
Latin American
members

Anglo-Saxon
members

South and East European members

Scandinavian
members

North European
members
31.0

30.1

30
28.3

27.5
25.7

25

24.0
23.1

22.3
20.7

20

27.7

27.2

26.8

26.3

29.4

22.7

22.6
21.5

25.5

24.8
21.8

23.5
22.5

20.1 20.1
19.0

17.4 17.8

18.1

18.1

16.8

15.2

15
12.2
10.1

10

9.0
7.7

5

0
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ico rea ile ey el an da lia d d om tes 33 21 nia lic d lic ary nia al ce ain aly d ay en d rk rg ds ny tria um ce
ex Ko Ch Turk Isra Jap ana stra alan elan gd Sta CD- EU- sto pub olan pub ng ove rtug ree Sp It elan orw wed nlannma bou rlan rma Aus elgi Fran
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P Re Hu Sl Po G
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EU-21 = All EU members in this figure; OECD = Organization for Economic Cooperation and Development; OECD-33 = All OECD countries excluding the United States
Source: OECD Social Expenditure Database (SOCX), 2014 update.

tax social expenditures to “just” 23.4 percent of GDP. Similar
logic reduced 2011 public net after-tax spending levels by more
than 5 percentage points of GDP in other high tax jurisdictions
like Finland and Austria. On the other hand, relatively low tax
countries like Mexico, Korea, Chile, Australia, and the United
States,11 where many cash benefits are not subject to any taxation, or full and indirect taxation is lower, recouped less than 1
percent of GDP from gross public social expenditures in 2011.
Accounting for the full effects of taxation in a number of
OECD countries renders the implied “after-tax redistribution
levels” arising from the cash benefit part of social expenditures
significantly lower than suggested by gross expenditure levels. It
can even be argued that such taxation of cash benefits ensures
that everyone in society contributes to the financing of welfare
states. That “everyone pays into the system” is probably of polit11. The United States at 3.9 percent had the lowest indirect taxation levels in
the OECD in 2011 (OECD 2014a).

ical significance in OECD countries with high social expenditures and helps retain political support for such redistributive
policies.
OECD government tax systems, however, also affect the
true level of social spending in another important manner,
namely in the form of foregone tax revenues, or tax expenditures,
through so-called “tax breaks for social purposes,” or TBSPs. The
OECD (2011) defines TBSPs as “those reductions, exemptions,
deductions or postponements of taxes, which: a) perform the same
policy function as transfer payments which, if they existed, would
be classified as social expenditures; or b) are aimed at stimulating
private provision of current benefits.”
TBSPs can take several forms. They can be similar to
cash benefits and include expenses related to measures like the
earned income tax credit (EITC) in the United States, or the
sizable family support (quotient familial) tax break in France.
TBSPs can also aim to stimulate private provision of current
transfers and include uses of the tax system to promote the

5

MARCH 2015

NUMBER PB15-4

Figure 3

Gross public social expenditure and the effects of taxation in OECD countries, 2011

percent of GDP
35
Asian and
Latin American
members

Anglo-Saxon
members

Scandinavian
members

South and East
European members

North European
members

30

27.0

25
25.3

20

24.1
23.0

22.7

21.8

21.0

20.4

19.8
18.3

15

16.3

22.0

22.7

20.0
18.0

17.9
16.5 16.4

18.0

16.2

14.0

11.1
8.6

5

23.4

18.9

18.6

16.9

13.5

10

18.1

21.2

22.5 22.6

22.0

9.4

7.3

0

–5

–10

M

ico rea ile ey el an da lia d d om tes 33 21 nia lic d lic ry nia al ce ain aly d ay en d rk rg ds ny tria um ce
ex Ko Ch Turk Isra Jap ana stra alan elan gd Sta CD- EU- sto pub olan pub nga ove rtugGree Sp It elan orw wed nlan nma bou rlan rma Aus elgi Fran
E Re
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P Re Hu Sl Po
Ic N S
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Gross public social expenditure

Direct taxation of cash benefits

Indirect taxation of consumption by benefit recipients

Net after-tax public social expenditure
EU-21 = All EU members in this figure; OECD = Organization for Economic Cooperation and Development; OECD-33 = All OECD countries excluding the United States
Source: OECD Social Expenditure Database (SOCX), 2014 update.

take-up of private social insurance coverage by individuals and/
or employer-based plans in the current year, most often private
unemployment or health insurance. The latter “health insurance type TBSP” in particular is very large in some OECD
countries with sizable populations covered by private health
insurance schemes. In the United States for instance, the Office
of Management and Budget (OMB 2014) estimates that the
TBSP allowing employers and individuals to write off medical
expenses and insurance premiums amounted to a tax expense of
$196 billion in fiscal year 2014 alone, or more than 1 percent of
US GDP. Lastly, many OECD countries use a TBSP to stimu-

6

late long-term private pension savings, e.g. to facilitate private
social benefit provision beyond the current year.12
Figure 4 illustrates what happens when the unrecorded
budget costs of TBSPs in the OECD countries are added to
public net after-tax social expenditures. OECD countries differ
substantially in their reliance on TBSPs for social outcome
purposes. The United States, the Netherlands, and Germany
12. Significant methodological challenges exist for constructing comparable
cost data for all OECD countries for TBSPs aimed at spurring long-term pension savings. Consequently, they are included only as a memorandum item in
OECD (2014a), and no data exist for Korea, New Zealand, or Denmark.

NUMBER PB15-4

Figure 4

MARCH 2015

Gross public social expendiure and tax effects in OECD countries, 2011

percent of GDP
35
Asian and
Latin American
members

South and East
European members

Anglo-Saxon
members

Scandinavian
members

North European
members

30
27.9

25
25.9
24.7

24.0
22.2

20

20.8
19.3

20.5

19.6
16.9 16.8

15.0

10.4

23.4

22.7

22.9

20.9

18.7

18.4

15

10

22.5 22.6

22.2 22.0

21.7
18.6

24.6

23.7

22.9

18.6

18.0

16.2

14.9

11.1

9.1

5

7.7

0

–5

–10
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ico (1 ile (1) e (1) da lia (1) nd om te 33 (2) nia lic (1) (1) ry nia a ce ain aly (1) ay en nd rk rg d ny tria um ce
ex a Ch key Isra an ana stra nd rela gd Sta CD- -21 sto pub nd lic nga ove rtug Gree Sp It nd orw wed inla nma bou rlan rma Aus elgi Fran
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Gross public social expenditure

Value of TBSPs

Direct taxation of cash benefits

Indirect taxation of consumption by benefit recipients

Public net after-tax social expendures, including TBSPs
EU-21 = All EU members in this figure; OECD = Organization for Economic Cooperation and Development; OECD-33 = All OECD countries excluding the United States;
TBSP = tax breaks for social purposes
1. Does not include data for TBSPs aimed at spurring long-term private pension provision.
2. Aggregate does not include data for TBSPs aimed at spurring long-term private pension provision for the Czech Republic and Poland.
Source: OECD Social Expenditure Database (SOCX), 2014 update.

implicitly spend around 2.5 to 3.0 percent of GDP on TBSPs,
while Australia, Canada, Hungary, Ireland, and the United
Kingdom spend between 1.5 and 2.5 percent of GDP. Several
OECD countries devote about 1 percent of GDP towards
TBSPs, while others spend a trivial amount.
The full effect of the tax system, as shown in figure 4,
clearly has an equalizing effect on true public social expenditures in OECD countries, as public net after-tax expenditure
levels are often substantially below gross expenditure levels. By
accounting for the full effect of the tax system, we can see that

American public social expenditures, at 20.8 percent of GDP,
are just 3.2 percent of GDP lower than average expenses in the
EU-21 and higher than expenses in Canada and Norway. The
United States general government in fact spends only a few
percentage points of GDP less on social affairs than most of the
Scandinavian welfare states.
Taxes in other words matter a lot—not least for measuring
how much governments really spend on social issues.

7

NUMBER PB15-4

I I I T H E F U L L P I C T U R E O F CO U N T R I E S’ S O C I A L
S P E N D I N G I N C LU D E S P R I VAT E S P E N D I N G
To get the true picture of the amount of resources a country
devotes towards social expenditure and hence make meaningful
outcome comparisons, it is necessary to include spending by
both the public and the private sector. Inherent in the SOCX
is the idea that from the perspective of an individual or household, or when comparing the ultimate societal outcomes of
social spending, it does not matter whether the public or the
private sector provides the resources for a specific social expense.
When the distinction matters, for instance when hospitalization is required, the individual or household’s ability to access
resources to alleviate a given social problem is not dependent

Private social spending, where
individuals and households pay for
their own social expenses, is often
outright regressive by design.
on the source of funding. On the other hand, as it is the
individual or household that is almost invariably the ultimate
source of funding for private social expenditure, the scope for
resource redistribution between different income groups in
society from private social spending is limited. The distinction
between public and private social spending therefore matters for
the implied degree of redistribution associated with the social
spending in question.
Specific public social spending items may be more or less
redistributive, depending on whether they are means-tested or
based on self-insurance and prior contributions (like private
systems). Yet public social spending, which in advanced economies is at least partly financed by progressive taxation systems
and generally targeted towards lower income groups, retains a
degree of progressive impact.
Private social spending, on the other hand, where individuals and households pay for their own (future) social
expenses, is often outright regressive by design. This situation
occurs when private social spending is incentivized through the
implicit general government budget costs of TBSPs. In progressive tax systems, the individual/household tax benefit derived
from a TBSP is always greater for higher income groups with
a higher marginal tax rate. Because the lowest income groups
pay very little or no income tax, they are essentially prevented
from benefitting from a TBSP, even if they are able to pay for a
private social expense; consequently by definition a TBSP over-

8

MARCH 2015

whelmingly profits higher income groups.13 The Congressional
Budget Office (CBO 2014) estimates that the average tax rate
for the lowest income quintile in the United States (which has a
highly progressive set of marginal income tax brackets) in 2011
was just 1.9 percent, whereas it was 23.4 percent for the top
income quintile. In other words, the financial benefit derived
from the same TBSP in 2011 was 12 times greater for a top
income quintile earner in the United States when compared
to the lowest income quintile. It would seem straightforward
to assume that advanced economies in which higher income
groups possess a lopsided political influence would prioritize tax
incentivized private social spending over the public kind.
Private social spending can take two principal forms:
Mandatory Private Social Spending This includes private social
spending mandated by law by either individuals or employers
on things like incapacity-related cash benefits, occupational
accidents, sickness, or participation in some old-age pension
plans.
Voluntary Private Social Spending Depending on the OECD
country, this can include many of the same things that are
mandatory private social spending in advanced economies
but may also cover items such as employer-provided childcare
support, supplementary wage insurance, or additional leave
provisions. Healthcare expenses in the United States typically
fall under this category.
Often private social expenditures will benefit from the
TBSPs discussed in the previous section, and the gross value of
TBSPs going towards such private social spending (grey bars in
figure 4) must therefore be subtracted from the value of gross
private expenses, just as the direct and indirect taxation effects
must be accounted for in public social spending.
Figure 5 starts with the net public after-tax social expenditure from the red horizontal bars in figure 4 (blue vertical
bars in figure 5) and adds to them mandatory (grey bar) and
voluntary (yellow bar) private social spending, while subtracting
direct and indirect taxation income for the government from
private social spending, as well as the government cost of TBSPs
towards their provision.
Figure 5 shows there are very large country differences in
the OECD in spending levels, especially for voluntary private
social spending. In gross terms, this category accounts for more
than 10 percent of GDP in the United States (overwhelmingly
private social spending on health care), and 5 to 6 percent of
13. Many of the lowest income groups in society though are often elderly,
people with severe disabilities, or students, who therefore earn no regular
taxable wage income.

NUMBER PB15-4

Figure 5

MARCH 2015

Net after-tax public and private social expenditure in OECD countries, 2011

percent of GDP
35

Asian and
Latin American
members

South and East
European members

Anglo-Saxon
members

30

Scandinavian
members

North European
members 31.3

28.8

27.4

26.1

25.6

25.8

25

24.0 23.7
21.9
20.7
19.8

20

24.8

21.6
20.6

21.1
17.6

25.8 24.3
25.3

24.6
23.4
20.4

19.3

18.8

26.1

25.4

19.3

19.1

16.8

15.7

15

14.2
13.1
11.6

11.1

10
7.7

5

0

–5

–10
s
s
ico (1) ile (1) el (1) da lia (1) d om te 33 (2) nia lic (1) (1) ry nia al ce ain aly (1) ay en d rk rg d ny tria um ce
ex a Ch key Isra an ana stra nd elan gd Sta CD- -21 sto pub nd blic nga ove rtugGree Sp It nd orw wed inlannma bou rlan rma Aus elgi Fran
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F D em th G
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Value of TBSPs

Direct and indirect taxation of voluntary private social spending

Direct and indirect taxation of mandatory private social spending
Net after-tax total social expenditure

Gross voluntary private social spending

Gross mandatory private social spending

Public net after-tax social spending, including TBSPs

EU-21 = All EU members in this figure; OECD = Organization for Economic Cooperation and Development; OECD-33 = All OECD countries excluding the United States;
TBSP = tax breaks for social purposes
1. Does not include data for TBSPs aimed at spurring long-term private pension provision.
2. Aggregate does not include data for TBSPs aimed at spurring long-term private pension provision for the Czech Republic and Poland.
Source: OECD Social Expenditure Database (SOCX), 2014 update.

GDP in the Netherlands and the United Kingdom. In most
other OECD countries, total private social spending accounts
for no more than 2 percent of GDP.
Adding the net additional private social spending to net
after-tax public social spending dramatically changes the
OECD country ranking for the total level of resources devoted
to social expenditures. Figure 6 presents the true ranked picture
for OECD countries’ net after-tax total social expenditures.
Figure 6 shows how France, at 31.3 percent of GDP, tops
the OECD in total social expenditure by a substantial margin, as
it does in figure 2 for gross public social expenditure. However,

in second place and ahead of the traditionally assumed “big
social spenders” in Europe is the United States, catapulted to
this position by its high levels of private social spending.
Total net after-tax social spending in the United States
is consequently 3 percentage points of GDP higher than the
EU-21 average and 7 to 8 percentage points of (a relatively
larger US) GDP higher than the non-US OECD average. The
US “welfare state” might be relatively small, but that doesn’t
mean that total social spending is low in the United States,
just that it takes the form of nonredistributive private social
spending relatively more than in other advanced economies.

9

MARCH 2015

NUMBER PB15-4

Figure 6

Net after-tax total social expenditures in OECD countries, 2011

percent of GDP
35
31.3

30

28.8
27.4

25

23.4 23.7

20

19.3 19.3
18.8 19.1
17.6

19.8

20.4 20.6 20.7

21.1 21.6

24.0

24.8
24.3 24.6

25.3 25.4 25.6

25.8 25.8 26.1 26.1

21.9

16.8
15.7

15

14.2
13.1
11.1

11.6

10
7.7

5

0

M

s
ico (1) (1) ile nia el (1) lic 1) rg (1) ay lia (1) ry da 33 nia d d ce al tria en ain ny ly (1) ds (2) om ark m te ce
ex ey rea Ch sto Isra nd pub nd ( bou lic orw stra nd nga ana CD- ove elan nlanGree rtugAus wed Sp rma Ita an rlan -21 gd nm lgiu Sta Fran
k o
e
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n
b
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r
l
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C
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e
i
d
S
r
E
N
a
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l
l
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F
B te
l m u
A ce H
G
P
Ja eth EU d K D
O S
Tu K
i
Po ak R Zea uxe Rep
I
N
v w L h
Un
ite
o
l
n
c
e
S N
U
e
z
C

EU-21 = All EU members in this figure; OECD = Organization for Economic Cooperation and Development; OECD-33 = All OECD countries excluding the United States;
TBSP = tax breaks for social purposes
1. Does not include data for TBSPs aimed at spurring long-term private pension provision.
2. Aggregate does not include data for TBSPs aimed at spurring long-term private pension provision for the Czech Republic and Poland.
Source: OECD Social Expenditure Database (SOCX), 2014 update.

Truly “bare-boned” social welfare systems with low levels
of total net after-tax social spending at below 20 percent of
GDP are found among some of the poorer members of the
OECD (Mexico, Korea, Turkey, Israel, parts of Eastern Europe,
Australia, and New Zealand) and among some of the richest
OECD countries (Luxembourg and Norway). Figure 6 also
makes it clear that the often assumed “gold standard” among
welfare systems in Scandinavia is if anything slightly cheaper
to run than the European average, and certainly Scandinavians
spend less in total on social purposes overall than Americans do.
Due to the lack of comparable data, this Policy Brief
does not include relevant information about countries’ level
of (formal) private charitable donations, or (informal) family
support; however, box 1 provides an assessment as to whether

10

low levels of public social spending are associated with increased
charity.
I V “ VA LU E F O R M O N E Y ” F R O M S O C I A L ,
H E A LT H C A R E , A N D E D U C AT I O N S P E N D I N G
Evaluating the outcomes from overall social spending, or from
total sector spending in particular areas like health care, is
invariably shaped by competing democratic political interests.
Some may wish to limit resource redistribution out of fear of
inducing moral hazard or a dependency culture, while others
strive to reduce income inequality from a fairness perspective.
Some see an advantage in allowing prices to ration what they
see as otherwise insatiable demand for health care, while others

NUMBER PB15-4

Box 1

MARCH 2015

Public social spending and private charitable donations

It might seem reasonable that low levels of total public social spending would be countered by high levels of private generosity
in society, as residents make up for their low tax payments through plentiful private donations. Several issues, however, combine
to undermine such notions.
First, average levels of public after-tax social expenditures (see figure 4) in the OECD at just under 20 percent of GDP is about an
order of magnitude higher than the approximately 2 percent of GDP ($335.17 billion in 2013) that American individuals, foundations, estates, and corporations have given annually to charitable causes since 2009 (Giving USA 2014). As America is generally
considered to have the highest total level of charitable donations among advanced nations,1 it is clear that adding such donations
to public after-tax social expenditures will not materially change the total resource rankings presented in this Policy Brief. The
levels of private charitable giving are simply too small to make up for differences in much higher public spending levels.
Second, private charitable giving is a mixed bag of causes and collateral, many of which may not contain any apparent “social
spending element.” Included in Giving USA’s total American charitable givings are various large pledges of artwork to museums,
such as the recent $500 million pledge of artwork made by media magnate Jerry Perenchio to the Los Angeles County Museum
of Arts.2 Similarly, one can argue that many donations to medical research or universities may be “good giving causes,” but they
embody only limited social spending character. This is especially the case with donations to elite universities with large existing
endowments.
And third, there is no inverse relationship between countries’ public net after-tax social spending and several measures of broad
private propensity to donate money and time to charitable causes. Box figure 1 combines data for populations’ propensity to
donate money and time from the latest World Giving Index (CAF 2014) and countries’ public net after-tax social expenditures.
Box Figure 1

Net public social expenditure, private donating, and volunteering, 2013
percent of population volunteering time

percent of population donating money
80

50
Donating money
Volunteering time

Ireland
United Kingdom
New Zealand
United States
Canada
Netherlands
Iceland Canada
Ireland
Australia
United States
New Zealand
Denmark

70

45

40

60
Australia
Israel

Austria
Sweden
Finland

35

Austria United Kingdom
Japan

30

Netherlands

Slovenia

50
Israel

Iceland

Finland
Slovenia

40

Denmark

Mexico

Germany
Germany
25
Belgium
Belgium
France
20

EstoniaSlovak Republic

30

Slovak Republic
Czech Republic
Poland
Czech Republic

20
Mexico

Estonia Poland

Italy Spain
Portugal Spain
Japan Portugal
Sweden

France
15

10

Italy

Turkey
Turkey

10

5

0

0
5

10

15

20

25

30

public net after-tax social expenditures 2011, percent of GDP

Sources: OECD Social Expenditure Database (SOCX), 2014 update; author's calculations; and Charities Aid Foundation (CAF 2014).

(continued)
1. CAF (2006, figure 1) presents data that shows total US charitable giving levels in 2005 to be more than twice as high in percentage terms of GDP than the secondranked advanced economy (the United Kingdom).
2. Soraya Nadia McDonald, “Jerry Perenchio, a very private man, just publicly bequeathed the L.A. County Museum half a billion dollars worth of art,” Washington Post,
November 7, 2014, http://www.washingtonpost.com/news/morning-mix/wp/2014/11/07/meet-jerry-perenchio-the-man-who-just-bequeathed-the-l-a-museumhalf-a-billion-dollars-worth-of-art/ (accessed on February 10, 2015).

11

MARCH 2015

NUMBER PB15-4

Box 1

Public social spending and private charitable donations (continued)

Box figure 1 shows that there is only a marginal relationship between public social spending and peoples’ private willingness
to donate time and money to charitable causes and that this correlation is only weakly positive. Advanced economies with higher
public net after-tax social spending hold populations that are somewhat more likely to donate time and money to charitable
causes.3
Box figure 1 also illustrates how the United States scores quite high on both residents’ willingness to donate money (68 percent)
and volunteer time (44 percent). At the same time, the United States is only one of several advanced economies with this approximate propensity of public willingness to give time and money to charity. Substantially higher levels of overall US generosity indicated when charitable giving levels are measured as a share of GDP consequently reflect the much larger size of some American
donations, rather than a stand-out big-heartedness among a much larger share of the population than elsewhere.
3. When the poorest OECD countries in Mexico and Turkey are excluded from box figure 1, this relationship turns marginally negative but similarly has almost no
predictive power.

worry that access to lifesaving procedures is potentially unequal
and therefore unethical. Yet it is necessary to try to assess very
large cross-country spending differences in these categories in
conjunction with data series capturing cross-country differences in relevant outcomes. This is particularly informative in
the evaluation of whether a specific government-private sector
spending breakdown yields better results in specific areas.
It is important to distinguish between outcome effectiveness and economic efficiency. Outcome effectiveness in public
policy means elected officials set a policy goal and achieve it
(effectiveness) or not (ineffectiveness). A hypothetical healthcare example would be a policy decision (following an election
pledge) to cut the mortality rate of breast cancer in half, followed
by an increase in earmarked resources towards this purpose to
be spent on improved preventative measures and timely treatment options. Deciding whether these measures were effective
or not would be straightforward.
Yet, effectiveness is a purely goal-oriented notion—e.g.
whether the policy goal was achieved or not—and is separate
from the concept of economic efficiency. Efficiency can only be
evaluated by considering the resources spent towards achieving
the policy goal. Returning to the pledge of halving breast cancer
mortality, a measure like mandatory annual mammograms
freely provided to all women over 18 may well prove effective at
achieving the goal. Yet it would not be efficient if it required the
transfer of resources away from other effective healthcare policies also aimed at achieving the goal of reducing breast cancer
mortality (or even mortality in general). Throwing money at a
given social problem may often be effective, but it is very rarely
efficient.
Numerous such policy intentions underlie the diverse
public and private social spending analyzed earlier, rendering
concise evaluations difficult. At the same time, what is clear is

12

that much of social spending is at least rhetorically intended
to alleviate the effects of poverty and broad income inequality.
Figure 7 illustrates whether advanced economies’ net after-tax
total social expenditures bear any resemblance to their broad
after-tax income inequality, proxied here by comparing the
disposable income of the highest decile of the population to
that of the lowest—the P90/P10 disposable income decile ratio.
Figure 7 shows a relatively strong relationship between
net after-tax total social spending in advanced economies and
their broad income inequality. Countries that spend more tend
to have lower levels of inequality, but the effect of spending
declines and becomes marginal at higher levels of spending.
A simple declining power function14 explains almost half of
the variation between OECD countries, if the United States
is excluded from the sample. At the same time, however, if
the four OECD members with the smallest net after-tax total
social expenditures are excluded from the dataset, there is no
longer any relationship between broad income inequality and
spending. This highlights the rapidly declining marginal effects
on income inequality of additional social spending above the 15
percent of GDP threshold in the OECD.
Yet at the same time, the four corners in figure 7 (efficient—
low spending/low inequality; underfunded—low spending/
high inequality; wasteful—high spending/high inequality;
and effective—high spending/low inequality) indicate that
similar levels of spending can result in very different inequality
outcomes. Substantially lower spending levels in Slovakia and
the Czech Republic thus result in inequality levels very close
to that of higher-spending Denmark. While this similarity in
14. This type of function is written as y = xz (where z is a negative constant)
and is chosen here to capture the presumption that the marginal impact additional social spending has on inequality declines.

NUMBER PB15-4

Figure 7

MARCH 2015

Net after-tax total social expenditure and broad income inequality, 2009–10

P90/P10 disposable income decile ratio
11
Underfunded

Wasteful

Mexico

10

9

8

Turkey

7

Israel
United States

6
Japan

Spain

Korea
5

Australia

Estonia

Canada Portugal Italy
Ireland
United Kingdom
New Zealand
Poland
Germany
Finland
Slovenia

4

Sweden
Norway
Netherlands Austria Belgium
R² = 0.4515
Czech Republic Iceland
Denmark

France

Slovak Republic

3
Efficient

Effective

2
5

10

15

20

25

30

35

net after-tax total social expenditure, percent of GDP, 2009*
OECD = Organization for Economic Cooperation and Development; P90/P10 = ratio of the income of the highest decile of the population to the income of the lowest decile
* Disposable income decile data for Japan and New Zealand use 2010 data.
Note: Size of bubbles indicates the relative share of public social spending; to facilitate reading, the percentage share of public spending in total spending has been raised
to the fifth power to exaggerate differences.
Source: OECD Income Distribution Database, http://www.oecd.org/els/soc/income-distribution-database.htm.

outcomes is likely related to the former two countries’ communist legacy, it also suggests that Denmark has relatively more
self-insurance-based and universal public social spending and is
hence less redistributive at the margin.
Meanwhile the United States stands out with arguably
the least efficient net after-tax total social spending in terms of
inequality, with both spending and inequality levels higher than
all other advanced economies except France (higher spending),
Israel, Turkey, and Mexico (higher inequality). The fact that the
United States has the highest share of after-tax private social
spending (the difference between the red bars in figures 4 and
5) at around 25 percent likely explains some of this outcome.
The relative shares of public spending in total after-tax social
spending is indicated by the size of the bubbles in figure 7; as the
smallest bubble in the figure, the United States has the highest
private share of spending. Yet other advanced economies like

Korea, Iceland, and the United Kingdom also have substantial
shares of 10 to 15 percent of after-tax private social spending
but far better inequality outcomes than in the United States.
This comparison suggests that a higher private social spending
share cannot entirely explain the low efficiency of US aggregate
social spending.
Inferences about the efficiency of resources used towards
specific policy goals are more straightforward when using the
same type of methodology on individual subcategories of social
spending. As healthcare spending accounts for the single largest
subcategory of aggregate social spending by far, this sector by
sheer aggregate economic importance is the obvious candidate
for analysis.
Figures 8a, 8b, and 8c illustrate the efficiency of total healthcare spending per capita in advanced economies using both a
broad and narrow indicator of health outcomes. Potential years

13

MARCH 2015

NUMBER PB15-4

Figure 8a

Healthcare spending and health outcomes: Potential years of life lost for men, ages 0–69

years lost per 100,000 men, 2012
10,000
Wasteful

Underfunded
9,000
Estonia

Mexico
8,000

Poland

Hungary
Slovak Republic

7,000

6,000

Chile
United States

Czech Republic
5,000

Turkey

4,000

3,000

France
Portugal
Finland
Slovenia New Zealand
Belgium Austria
Greece United Kingdom Germany
Japan Ireland Canada
Korea
Spain Italy
Denmark Switzerland
Australia
Norway
Israel
Iceland
Netherlands
Sweden
Luxembourg

R² = 0.613

2,000

1,000
Efficient

Effective

0
0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

average healthcare spending per capita, 2002–11, PPP US dollars
OECD = Organization for Economic Cooperation and Development; PPP = purchasing power parity
Note: Size of bubbles indicates relative share of total spending that is private.
Source: OECD Healthcare Database 2014.

of life lost (PYLL) is the broadest available summary indicator
of premature mortality, providing an explicit way of measuring
deaths occurring at younger ages (below 70 years), which are,
a priori, preventable.15 Figure 8a refers to PYLL for men and
figure 8b PYLL for women.
Figures 8a and 8b show a strong relationship between per
capita healthcare expenditure and PYLL levels for almost all
OECD economies. Countries such as Mexico that spend less
15. The calculation of PYLL involves summing up deaths occurring at each
age and multiplying this sum with the number of remaining years to live up to
a selected age limit. According to the OECD (2003, 16) premature mortality
measured in terms of potential years of life lost focuses on deaths among
the younger age groups of the population. Values are by definition heavily
influenced by infant mortality and deaths from diseases and injuries affecting
children and younger adults. A full list of causes of deaths included by the
OECD is available for download as an Excel file at http://stats.oecd.org/wbos/
fileview2.aspx?IDFile=9506bbe9-c549-4951-8410-757676477e2c (accessed
February 10, 2015).

14

have higher PYLL levels, while Norway and Switzerland at
around $5,000 per capita in healthcare spending have much
lower PYLL levels. Furthermore, the decline in PYLL levels
becomes more gradual at higher levels of healthcare spending.
The large difference in male and female PYLL levels across
advanced economies—male PYLL is on average 87 percent
higher than for women—is related to the large gender differences in preventable mortality due to external causes, including
accidents and violence.
Meanwhile it is quite evident that the United States is
the outlier among advanced economies in terms of healthcare spending and outcomes. America’s far higher healthcare
spending at around $7,500 per capita does not translate into
fewer preventable deaths. Especially for American women the
return on healthcare spending is appalling, as PYLL levels are
45 percent above the OECD average and on par with Mexico,
which spends just $858 on health care per capita. The situation

NUMBER PB15-4

Figure 8b

MARCH 2015

Healthcare spending and health outcomes: Potential years of life lost for women, ages 0–69

years lost per 100,000 women, 2012
6,000
Wasteful

Underfunded

Mexico

5,000

United States
4,000
Hungary
Chile

Slovak Republic
Estonia
Turkey
Poland
New Zealand
Belgium
United Kingdom Canada
Czech Republic
Slovenia
France Netherlands
Finland
Portugal
Ireland Denmark
Switzerland
Germany
Japan
Austria
Israel
Greece
Australia
Norway
Korea
Sweden
Spain Italy
Luxembourg
Iceland

3,000

2,000

R² = 0.4791

1,000

Efficient

Effective

0
0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

average healthcare spending per capita, 2002–11, PPP US dollars
OECD = Organization for Economic Cooperation and Development; PPP = purchasing power parity
Note: Size of bubbles indicates relative share of total spending that is private.
Source: OECD Healthcare Database 2014.

for US men is relatively better at PYLL levels just 31 percent
above the OECD average.16 Yet this does not change the fact
that the United States has far poorer healthcare outcomes relative to its spending than other advanced economies. The size
of the bubbles in figures 8a and 8b moreover makes it clear
that greater spending in the private sector provides no obvious
efficiency gains in health care.
Figure 8c shows the picture is essentially the same if one
chooses a narrow indicator of healthcare outcomes—infant
mortality—which captures the quality of a ubiquitous healthcare service that usually requires hospitalization, namely child16. The fact that US female PYLL levels are worse than male PYLL levels relative to the OECD average moreover suggests that the poor US PYLL scores
are not influenced by the comparatively higher levels of deadly violence in US
society.

birth. Again, there is a strong relationship between per capita
healthcare spending and infant mortality (with impact declining
as spending increases), and the United States is the noticeable
outlier with outcomes more than 50 percent worse than the
OECD average despite far higher spending levels.
In other words, whether a broad or narrow measure is
chosen, a reasonably clear tradeoff exists in non-US advanced
economies between expenditures and outcomes in health care,
and relative value for money is reasonably comparable: A given
level of per capita expenditure produces a given level of life years
saved and infant mortality. The relationship between healthcare spending and avoiding preventable deaths and reducing
infant mortality found among other advanced economies is far
better than in the United States. The higher share of private
spending in the United States (at least when compared to the

15

MARCH 2015

NUMBER PB15-4

Figure 8c

Healthcare spending and health outcomes: Infant mortality

death per 1,000 live births, 2012
14
Mexico
Wasteful

Underfunded

12

10
Chile
Turkey

8
United States
Slovak Republic

Hungary
Poland

6

New Zealand

Canada
United Kingdom
Belgium
Netherlands
France
Portugal
Ireland Denmark
Israel
Estonia
Switzerland
Germany
Australia
SpainItaly
Austria
Korea
Greece
Sweden
Czech Republic Japan Finland
Luxembourg Norway
Slovenia
Iceland

4
R² = 0.3282
2

Efficient
0

Effective
1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0
9,000

OECD = Organization for Economic Cooperation and Development; PPP = purchasing power parity
Note: Size of bubbles indicates relative share of total spending that is private.
Source: OECD Healthcare Database 2014.

more advanced OECD countries outside Latin America, as
low-spending Mexico and Chile also have substantial shares
of private healthcare spending) patently fails to produce better
healthcare outcomes for Americans.
Moving outside traditional social spending and applying
the same methodology to education spending in advanced
economies provides a more nuanced picture of the relative situation in the United States. Figures 9a and 9b plot total spending
levels17 and graduation rates18 for the upper secondary and
tertiary levels of education, respectively.
17. Because of the data available, figure 9a includes all educational spending
up to upper and post-secondary levels and hence also primary level education
spending. As the overwhelming majority of educational spending at these
levels in the OECD is in the public sector, no distinction is made between
public and private spending. Figure 9b, also for data availability reasons,
includes all educational spending for tertiary types A and B and advanced
research programs.
18. The data refer to “first-time graduates,” which includes students who have
graduated for the first time at a given level of education in the reference period. Thus, if a student has graduated multiple times over the years, he or she
is counted as a graduate each year but as a first-time graduate only once. For
tertiary graduation rates, foreign students have been subtracted out in coun-

16

Figures 9a and 9b illustrate how there is no strong relationship between total educational expenditures and the share of
young people who graduate with upper secondary and tertiary
degrees.19 Denmark and Iceland at almost 6 percent of GDP
spend nearly twice as much as Japan on education up to the
upper secondary level, yet these countries achieve roughly the
same 93 to 95 percent graduation rate. Spending in Denmark
and Iceland is thus quite effective, while in Japan far more
efficient. The US upper secondary graduation rate at 79
percent is among the lowest in the OECD, despite midrange
corresponding spending levels. Tertiary education is seemingly
underfunded in Italy and Mexico, while relatively more efficient
in Slovenia and New Zealand. The United States has among
the highest tertiary educational expenditures, though only a
tries where they are a significant population. This concerns Australia, Austria,
Canada, Chile, the Czech Republic, Denmark, Japan, the Netherlands, New
Zealand, Slovenia, and the United States.
19. For simplicity, figures 9a and 9b are depicted with a linear relationship
line, but the same weak relationship is present if other common functional
forms are chosen.

NUMBER PB15-4

MARCH 2015

Figure 9a Total educational expenditure and upper secondary graduation rates, 2011–12
upper secondary graduation rates (first time*), percent
100
Efficient

Hungary

Japan

Finland
90
Slovak Republic

Slovenia
Netherlands
Switzerland
Germany
Spain
Ireland
Korea
Canada
Poland

Italy
Czech Republic

Effective
Iceland
Denmark

United Kingdom

Israel

Norway

Chile
New Zealand

United States

80

Sweden
y = 3.7079x + 68.94
R² = 0.0578

Luxembourg

70

Austria

60
Turkey

50

Mexico

Underfunded

Wasteful

40
2.5

3

3.5

4

4.5

5

5.5

6

total education expenditure up to upper secondary and post-secondary nontertiary education, percent of GDP
OECD = Organization for Economic Cooperation and Development
* Refers to students who have graduated for the first time at a given level of education in the reference period.
Source: OECD Education at a Glance (2013).

midrange graduation level of around 50 percent. Furthermore,
there is no apparent relationship between a country’s graduation
rate and the share of private spending on tertiary education.20
Overall, there is no strong relationship between spending and
broad-based educational achievement among advanced economies, while the United States’ generally quite high devotion of
resources towards education seems only modestly successful.

20. Graduation rates are a broad measure of the value of educational spending,
and this analysis does not attempt to adjust for the quality of the education.
This may penalize countries like the United States where the best private
universities are often very expensive.

V CO N C LU D I N G R E M A R K S
By including the full effect of tax systems and how countries
allocate social spending differently between the private and
public sector, cross-country differences in total spending for
social purposes generally drops—and the often perceived
transatlantic divide virtually disappears. This is comforting for
believers in the importance of pocketbook issues in politics, as
relatively similar populations on both sides of the Atlantic ought
to spend about the same share of their incomes and resources on
similar social tasks and services. It seems clear though that the
French government has ample scope to reduce its record-high
total social spending levels.

17

MARCH 2015

NUMBER PB15-4

Figure 9b Tertiary graduation rates and educational expenditures, 2011–12
graduation rates, tertiary types A and B (first time),* percent
80
Japan

Efficient

Effective

New Zealand
Ireland
70
Slovenia

y = 5.1139x + 39.607
R² = 0.0405

Iceland
Australia
60

Poland

Chile

United States

Denmark

50

Slovak Republic
Spain

Germany

Sweden

Austria

Norway

Switzerland

Canada

40
Portugal

30

Finland

Italy

Czech Republic Netherlands

Mexico

20

Underfunded

Wasteful

10
1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

all tertiary educational expenditures, percent of GDP
* Refers to students who have graduated for the first time at a given level of education in the reference period.
OECD = Organization for Economic Cooperation and Development
Note: Size of bubbles indicates relative share of total spending that is private.
Source: OECD Education at a Glance (2013).

The finding that the true level of US social expenditures
is fully comparable to European spending but seemingly yields
worse outcomes than in Europe suggests several implications.
First, any debate in the United States about whether present
social protections and services are sustainable should not focus
on the possible need to substantially increase spending. Instead,
the political battle must be about how and to whose benefit
the United States allocates its current level of social spending—
which, if European levels are any guide for adequacy, is already
sufficiently high.
Second, it seems evident that even macroeconomically relevant cost savings can be achieved in the US healthcare sector by

18

adopting more “best practices” from other advanced economies.
Americans can get access to both better and cheaper healthcare
services by learning how to manage health care from other advanced economies.
Third, tax subsidization of private sector spending towards
social purposes (as well as grossly inefficient healthcare spending)
masks the true (higher) spending level in the United States. Tax
breaks for social purposes are political expedient: They inherently result in lower taxes and no new recorded government
spending. Hence they present US policymakers with the opportunity to take positive new government social policy action to
alter the economic incentives faced by private actors and in the

NUMBER PB15-4

process achieve a smaller measured size of government. TBSPs,
however, disproportionally benefit higher income Americans,21
and their “government handouts” are shielded from the same
public scrutiny legislatively demanded of alternative social
policy proposals that result in actual government social services
provision and spending.

MARCH 2015

And lastly, the relatively large scale of TBSPs and the associated overall poor social outcomes in the United States indicates an excessively reliance on them to the detriment of fiscal
sustainability, transparency, and redistributive fairness.
Improving the overall quality of US social spending therefore requires an overhaul of the US tax code.

21. See GAO (2005) and CBO (2013).

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This publication has been subjected to a prepublication peer review intended to ensure analytical quality. The views expressed are those of
the author. This publication is part of the overall program of the Peterson Institute for International Economics, as endorsed by its Board
of Directors, but it does not necessarily reflect the views of individual members of the Board or of the Institute’s staff or management. The
Institute is a private, nonprofit institution for rigorous, intellectually open, and indebth study and discussion of international economic
policy. Its purpose is to identify and analyze important issues to make globalization beneficial and sustainable for the people of the United
States and the world, and then to develop and communicate practical new approaches for dealing with them. The Institute is widely viewed
as nonpartisan. Its work is funded by a highly diverse group of philanthropic foundations, private corporations, and interested individuals,
as well as income on its capital fund. About 35 percent of the Institute’s resources in its latest fiscal year were provided by contributors from
19
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