The growth of government over the past century has been accompanied by considerable changes in the composition of public spending reflecting the changing perceptions of what the state should do. A century ago, spending was mostly limited to the maintenance of law and order, external security, and to some very limited amount of government services and investment. Over the subsequent decades, the provision of government goods and services was extended considerably. In recent decades, however, real or exhaustive government spending did not grow much in most countries. Instead, especially cash spending often associated with social programs grew rapidly. Most of this increase resulted from explicit policy decisions and, thus, was not the result of some technical factors such as the “Baumol's disease” or even of Wagner's Law. In other words, there was nothing automatic or inevitable about it that could not have been prevented by determined governments. In more recent years, unemployment and demographic changes have also contributed to the growth of public spending. If current policies persist, the growth of social spending, including pensions and health expenditure, will continue and, together with the growing real interest burden on public debt in several countries, could push public spending to unsustainable levels.

GOVERNMENT REAL EXPENDITURE

Government real expenditure has grown considerably over the past 125 years, with the bulk of this growth having taken place by 1980 in most countries. At the end of the nineteenth century, government real expenditure ranged between 2.5 and 6.7 percent of GDP for the seven countries for which data are available (Table II.1).